Reorganization of Capital Markets

Reorganization of the capital markets (자본시장 정비/資本市場整備) was called for as a top-priority agenda for financial reform after the IMF Crisis.

As the currency crisis settled down, the Korean government pushed steadily ahead with financial opening, financial regulatory easing and improvement of the financial infrastructure, together with financial structural adjustment, and as a result it could achieve such outcomes as financial market stability, heightened external credibility, and a system for ensuring financial institution management soundness.

On this basis, from the mid-2000s nation-wide efforts had been made to financial system improvement, to promote the financial industry as a growth industry capable of creating high value-added and high quality employment.

Key words
capital markets, IMF Crisis, growth industry, reorganization, advancement

New Capital Markets Act
Firstly, in August 2007, six existing laws addressing the capital markets were bundled into the Financial Investment Services and Capital Markets Act (enforced in February 2009; hereafter "the Capital Markets Act").

By encouraging financial innovation and competition through the reorganization of regulations on the capital markets and financial investment enterprises, as well as expanding the direct financing market through measures such as the cultivation of large-scale investment banks and revitalization of the capital markets, this new Capital Markets Act aimed to create a foundation fostering harmony within the existing system of indirect financing centered around banks.

Businesses operated by financial investment houses were sorted into six categories ― investment trading, investment brokerage, collective investment, trust, discretionary investment, and investment advisory ― and individual entities became required to either receive selective approvals or be registered in one or several of these categories in order to operate financial investment businesses.

In this regard, categorized businesses considered highly likely to have conflicts of interest with each other were prohibited from sharing information on transactions, prevented from having the some executives working at more than one of them, and allowed only limited collective access to one another’s offices.

Furthermore, financial investment businesses with more than 2 trillion won in inherent assets and over 6 trillion won in investments were required to appoint non-executive directors and install auditing committees. The Act defines financial investment products as all financial instruments that entail the possibility of generating losses from their original amounts, based upon the all-inclusive concept. Article 3 (Financial Investment Instruments) of the Capital Markets Act
 * (1) The term financial investment instrument in this Act means a right acquired by an agreement to pay, at a specific time in the present or in the future, money or any other valuable thing (hereinafter referred to as "money or similar"), with an intention to earn a profit or avoid a loss, where there is a risk that the total amount of such money or similar, paid or payable, for the purpose of acquiring such right (excluding any sums specified by Presidential Decree, such as sales commissions) may exceed the total amount of money or similar already recovered or recoverable from the right (hereinafter referred to as "investment risk"): Provided, That the following instruments shall be excluded herefrom:
 * 1. Negotiable certificates of deposit in Korean won; and
 * 2. Beneficial interest in a trust with no power (excluding the power to dispose of the trust property under Articles 42 and 43 of the Trust Act) granted to the trustee to dispose of the trust property (hereinafter referred to as "management trust").
 * (2) The financial investment instruments under paragraph (1) shall be classified as follows:
 * 1. Securities; and
 * 2. Derivatives:
 * (a) Exchange-traded derivatives; and
 * (b) Over-the-counter derivatives.

Article 4 (Securities)
 * (1) The term securities in this Act means financial investment instruments issued by a citizen of Korea or a foreigner, for which investors do not owe any obligation to pay anything further on any ground, in addition to the money or similar that the investors paid at the time of acquiring such instruments (excluding obligations to pay where an investor assumes such an obligation by exercising a right to effectuate the purchase and sale of an underlying asset).
 * (2) The securities under paragraph (1) shall be classified as follows:
 * 1. Debt securities;
 * 2. Equity securities;
 * 3. Beneficiary certificates;
 * 4. Investment contract securities;
 * 5. Derivatives-combined securities; and
 * 6. Securities depositary receipts.
 * (3) The term debt securities in this Act means state bonds, local government bonds, special bonds (referring to bonds issued by a corporation established by direct operation of an Act; hereinafter the same shall apply), corporate bonds, corporate commercial papers (referring to promissory notes issued by a company for raising the funds required for its business, which shall meet the requirements prescribed by Presidential Decree; hereinafter the same shall apply), and other similar instruments, which bear the indication of a right to claim the payment.

Financial investment products were classified into securities, listed derivatives and over-the-counter (OTC) derivatives. Securities were then further divided into debt securities, equity securities, beneficiary certificates, securities depository receipts, investment contract securities and derivatives-linked securities (DLS).

Advancement of Securities Industries
This expansion and systemic reorganization of the capital markets since the mid-2000s has led to a remarkable growth in new securities-related institutions. From 2005 to 2010, 39 collective investment businesses and eleven financial investment dealers (stock companies) were created. Notably, as of end-2010 the number of collective investment businesses stood at 80, a 2.6-fold increase from the 31 that existed at the time of the 1997 currency crisis.

Moreover, the development of capital markets and the efforts of financial institutions to diversify their businesses influenced an expansion of newly-established financial holding companies. From 2001, financial holding companies began to be created centered around banks.

The KDB Financial Group was re-founded in October 2009, by converting the Korea Development Bank (KDB) from a specialized bank to a company limited by shares. This meant that the KDB was now in principle subject to the Banking Act, and also that its range of services could be expanded to the scope of a commercial bank, allowing it a basis for competing with commercial banks.

As of end-September 2011, there were nine bank holding companies and three non-bank holding companies in operation in Korea, making twelve financial holding companies in total.

Credit Facilities for the Underprivileged
Meanwhile, after the 1997 currency crisis, a considerable decline in the number of banking facilities providing small-scale loans to the underprivileged for living expenses, through the liquidation of insolvent financial institutions and processes of mergers and acquisitions of banks, caused an increase in the lending business.

In response, the government worked to repair the related systems in an effort to protect the underprivileged having poor credit histories from usurious interest rates and illegal dealings with unregistered private and institutional money lenders.

In 2007, to protect financial consumers from unregistered money lenders, the government reenacted the Interest Limitation Act, which had been abrogated in 1998. Plans to invigorate microfinance services, which can increase the financial access of the underprivileged, were also actively carried out.