Financial markets

Financial markets (금융시장) are organized venues where economic players may raise and operate funds through transactions in financial instruments. The financial markets are divided into the direct and the indirect financing markets, depending upon whether or not the transactions are conducted through financial intermediaries. The indirect financing markets are exchanges where funds are brokered through deposits and loans; the deposits and loans market is a good example.

Financial transactions are carried out by banks, non-bank depository institutions, collective investment business entities, trust business entities, etc., that provide funds by lending money or by buying direct securities with funds raised through indirect securities such as certificates of deposit and beneficiary certificates.

Financial transactions into direct financing markets are undertaken as the fund providers purchase direct or primary securities issued by the end consumers of the funds, such as financial debentures or corporate bonds. Accordingly, the direct financing markets, which do not depend on financial intermediaries, play more active roles and are more diversified than the indirect financing markets.

In accordance with the maturities of the financial instruments involved, the direct financing markets are generally divided into the money markets and the capital markets. Additionally, they can be divided into the foreign exchange markets and the financial derivatives markets, in consideration of the features of the financial instruments concerned.

Key words
money market, instrument, capital market, foreign exchange, financial derivatives

Money Markets
The money markets are those markets where financial instruments that expire within one year are commonly transacted in order to maintain the balance of the supply of and the demand for short-term funds.

The money markets in Korea embrace the call market, as well as a wide range of other financial markets including those for commercial paper (CP), certificates of deposit (CDs), repurchase agreements (RPs), monetary stabilization bonds (MSBs) and cover bills (CBs).

Capital Markets
The capital markets are those where the means to raise long-term funds, such as stocks and bonds, are issued and transacted. These are usually categorized into the stock market and the bond market.

The secondary stock market is further divided into the marketable securities market and the KOSDAQ (Korea Securities Dealers Automated Quotation), where listed stocks are traded, and the Free Board for unlisted stocks.

The bond market is where long-term bonds with maturities of one year or more are issued and traded. The secondary bond market is divided into the face-to-face market (marketable securities market) where listed bonds are traded, and the off-board market where all bonds including unlisted bonds can be transacted.

The capital markets include the newly emerging asset-backed securities market, which is seen as a means for companies and financial institutions to mobilize funds. This market is where asset-backed securities (ABSs), issued based on illiquid assets such as properties, accounts receivable and mortgage-backed securities, are traded.

The capital markets are organized and regulated pursuant to the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”, 자본시장과 금융투자업에 관한 법률).

Foreign Exchange Market
The foreign exchange market is the place where the regular or continuous trading of foreign currencies occurs between foreign currency purchasers and suppliers.

The foreign exchange market is divided between the customer market, where foreign currency is traded between general consumers and foreign exchange banks, and the inter-bank market, where foreign currency is transferred between foreign exchange banks.

However, the foreign exchange market most commonly refers to the inter-bank market, as this is where the basic exchange rate is determined.

Financial Derivatives Market
The financial derivatives market is the place where financial derivatives designed to reduce the risk of changes in the value of underlying assets can be traded.

The financial derivatives market in Korea consists of the market for stock, interest rate and currency derivatives, together with the credit derivatives market and the derivative-linked securities market.