Korea Securities Depositary

The Korea Securities Depositary (KSD, 한국예탁결제원) is a securities depository and a settlement institution.

The Securities Depository System was introduced in order to facilitate the issuance and effective distribution of securities by, first, the depositing of all securities transacted in the securities market into centralized securities deposits in a securities depository organization, and the replacing then of the settlements and actual delivery of physical securities accompanying sales, transfers and collateralized transactions between transaction participants with a book-entry system.

Key words
securities depositary, clearance and settlement, registration of bonds

History
Korea’s securities depositary and settlement system was introduced after the securities market expanded in scale and increased in volume in the early 1970s, in order to lower the risk of securities getting lost or stolen in physical distribution and simplify and enhance the efficiency of sales transaction settlement services, by amending the Securities and Exchange Act (증권거래법) in 1973 to add clauses regarding central deposit and book-entry clearing services so that the KRX could provide these services.

The Korean Securities Settlement Corporation (KSSC) was established in 1974, and as the KRX entrusted it with these services in 1975 the KSSC began to provide securities depositary and settlement services in earnest. In 1994, as the KSSC became the central securities depositary (CSD, 중앙증권예탁기구) in line with the Securities and Exchange Act, its Korean name was changed to the Securities Depositary, and then to Securities Depositary and Settlement in 2005, and to Korea Securities Depositary and Settlement as of 2009. In English, however, it is referred to as the Korea Securities Depositary.

Businesses
As the central securities depositary, the KSD mainly provides services such as the central deposit of listed securities, book-keeping entry, securities clearance and settlement services. On behalf of depositors, the KSD also settles matters such as the exercising of rights regarding deposited securities, and on behalf of securities issuing houses acts as their agent in all matters related to securities such as the issuance of securities and the payment of dividends. The KSD in addition also provides services related to funds, to the registration of bonds and debentures, to the management of collateral, etc.

Securities Depositary and Settlement Services
The KSD receives securities deposits by opening accounts for banks, financial investment business entities, insurance companies, foreign securities depositary organizations, institutional investors, etc. In the cases of general corporations and individual investors, the KSD receives securities deposits indirectly through financial investment business entities (investment brokerage business entities).

To enhance the efficiency of their safekeeping and management, deposited securities are not categorized by depositor but rather kept together by type, and the legal relationships between rights and duties are made clear by recording the depositors’ names, addresses, types and quantities of the securities, causes for fluctuations in quantity, etc., in the depositors’ account books. As of end-June 2011, stocks, bonds, CDs and CP in custody of the KSD amounted to market capitalization of 2.6 quadrillion won.

When a securities sale has occurred, the KSD first receives the transaction information from the KRX and the institutions involved in the sale, then confirms that the buyer has deposited the full payment, and finally settles the securities at the same time as the payment through book-entry between accounts. For this purpose, the KSD operates SAFE (Speedy, Accurate, Faithful, Efficient), a securities depositary and settlement information network that connects to customers’ computers as an electronic system of services.

Looking at the securities settlement services of the KSD by the market concerned, in the face-to-face markets the KSD operates the Securities and the KOSDAQ Market Settlement Systems, providing securities settlement services through BIS DvP Model III (simultaneous net settlement of securities and fund transfers).

In the off-board markets, it provides securities clearance and settlement services by operating the Institutional Settlement System for Bonds and the Institutional Settlement System for Stocks. Settlements are processed on a case-by-case basis for bonds, and simultaneously by each entity involved in stock transactions. The volumes of face-to-face plus off-board market settlements through the KSD’s Securities Settlement Systems reached 29.1 trillion won in total in 2010.

Services for Execution of Rights Regarding Deposited Securities
The KSD processes the dividends, principal and interest, obtainment of stocks and all other matters for every right regarding deposited securities. The depositor and the investors, who are the depositor’s customers, thus do not have to redeem the securities from the KSD in order to exercise their rights. In 2010, the KSD exercised rights on behalf of customers to 810.4 trillion won worth of deposited securities.

Transfer Agent Services
Meanwhile, the KSD also acts as a transfer agent based on unique functions that it performs such as depositing and settling securities and managing de facto stockholders. “Transfer agent services” refer to the processing of matters related to stocks such as managing the lists of shareholders on behalf of the issuing houses, transferring the names of shareholders, assigning and providing notification of the rights of shareholders such as the rights to vote and to acquire new shares, issuing stocks and paying dividends. And while these are not exclusive services of the KSD, the KSD was the first to provide them, and to this day remains the largest provider of transfer agent services.

Services Related to Foreign Securities Transactions
KSD services such as securities depositary and settlement and custodianship over deposited securities are not restricted to domestic transactions. When a Korean investor invests in foreign currency securities, to keep the deposited foreign currency securities overseas the KSD designates a Global Custodian or an International Securities Depositary (ICSD) as the foreign custodial organization to process settlements and act as custodian.

When a foreign investor invests in Korean securities, the KSD holds the Korean securities obtained by the foreign investor, and acts as the standing representative. When a Korean company issues a Depositary Receipt (DR) in a foreign securities market, the KSD takes custody of the underlying shares. When a foreign company issues a DR in Korea, however, the KSD designates an organization in a foreign market to hold the underlying shares in the name of the KSD and to act as the custodian of them.

The KSD also supports the listing of Korean companies in foreign markets, and of foreign companies in the Korean market. To promote such cross-border securities transactions, as of June 2011 the KSD had established Cross-border Clearing Networks (CCNs) in 36 foreign markets including that of the United States.

Other Services
Through FundNet, a collective investment securities and asset depositary system, the KSD standardizes and automates services ranging from the establishment, redemption and beneficiary list management of collective investment securities (funds), to the central deposit, concurrent settlement and fund-based ledger management of collective investment assets. As a specialized bond registration institution, moreover, the KSD also provides registration services for national housing bonds, public bonds and corporate debentures. It acts in addition as an intermediary for securities lending transactions, in which it lends securities and receives a commission, for repurchase agreement sales, and for collateralized call transactions (the short-term borrowing and lending of capital with securities, etc., as collateral).