## EXECUTIVE SUMMARY (_cr14308) ## Source details **Canonical URL:** [EXECUTIVE SUMMARY (_cr14308)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14308.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14308.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14308.pdf.json) --- ### Introduction and assessment scope - Assessment conducted in the context of the IMF’s Financial Sector Assessment Program (FSAP) to the Republic of Korea in April and July 2013. - Assessors: Gynedi Srinivas (World Bank’s Payment Systems Development Group) and Froukelien Wendt (IMF’s Monetary and Capital Markets Department). - Scope: assessments of BOK-Wire+ and the KRX CCP against the Principles for Financial Market Infrastructures (PFMI); assessment of authorities (BOK, FSC, FSS) using responsibilities for authorities of FMIs. - Information base: national laws, regulations, rules, procedures, annual reports, self-assessments, IMF questionnaire responses, websites, and meetings with BOK, FSC, FSS, KRX, KSD, and stakeholders. - Assessment based on information available in July 2013; information after July 2013 not taken into account. ### Korea’s payment, clearing, and settlement landscape - Major infrastructure: - BOK-Wire+ — real-time interbank gross payment and settlement system, owned and operated by the Bank of Korea (BOK). - KRX — operates KOSPI, KOSDAQ, and the derivatives market (DM); provides CCP services and holds a majority stake in KSD (CSD/SSS). - Historical milestones/facts: - KRX opened for trading in 1956 with 12 listed companies. - Continuous trading introduced in 1975; automated order-routing in 1983. - BOK operated BOK-Wire since December 1994; upgrade launched May 2005; BOK-Wire+ replaced BOK-Wire in 2009. - Futures and options available since 1996 and 1997. - 2012 KRX rankings: - number one by number of stock index option contracts traded in the world, - number five measured in value of bond trading, - number eight in value of share trading. - Ongoing/planned initiatives: - Authorities decided to introduce a CCP for OTC derivatives in 2014. - Discussions ongoing on transforming current trade reporting systems into full-fledged trade repositories (TRs). ### BOK-Wire+: status and key findings - Overall assessment: largely compliant with the PFMI and overall sound. - Operational/legal features: - Hybrid RTGS with continuous bilateral and multilateral offsetting. - Used for settlement of short-term financial transactions, cash leg of securities transactions, KRW leg of foreign exchange settlement, retail payments, BOK monetary policy operations, issuance/redemption of government and public bonds. - All transactions once settled in BOK-Wire+ are deemed final and irrevocable. - Debtor Rehabilitation and Bankruptcy Act (enacted in 2006) stipulates transactions settled in BOK-Wire+ are exempt from bankruptcy proceedings. - Strengths: - Comprehensive and transparent risk management frameworks, governance arrangements, operational systems. - Regularly tested default and business continuity procedures. - Areas for improvement (summary): - Collateral risk management: adopt regular testing of haircuts; conduct independent validation of haircut procedures at least annually. - Clarify regulations regarding settlement finality and queue management, particularly revocation of queued transactions. - Fully implement disclosure framework, including disclosure of relevant rules and regulations in English. - Strengthen BOK oversight powers to include linked FMIs and participants, particularly to obtain authentic information and enforce compliance. ### KRX-CCP: status and key findings - Role/systemic importance: - CCP central to safety and efficiency but concentrates systemic risk; clears all KRX securities and derivatives products. - Recent improvements: - Introduction of intraday margin calls (planned/underway). - Implementation of back testing and sensitivity analysis (require further implementation). - Increased sizes of joint compensation fund and settlement reserves. - Operational risk management system introduced January 2013. - Key deficiencies and recommendations (summary): - Credit risk management: - Collect risk-based collateral (margin) on a daily basis for securities market exposures between transaction and settlement days. - Reconsider design of joint compensation funds; remove fixed size requirement to adapt to increased exposures. - Increase criteria for settlement banks and custodians. - Review and validate KRX’s margin and risk models by an experienced and independent entity. - Governance and staffing: - Improve independence of the KRX risk management committee (currently chaired by an executive director with strategy/planning responsibilities). - Increase staff size for credit and liquidity risk management. - Increase KRX focus on CCP safety and financial stability in company objectives. - Recovery planning: - Maintain viable recovery plans with preventive measures to restore CCP operations as a going concern. - Identify critical operations to continue during crisis. - Develop crisis scenarios beyond default procedures and BCPs, including extreme but plausible events (example: default of a large participant that is part of a financial group providing multiple services combined with a decrease in value of widely used collateral). ### Authorities, regulatory structure, and supervisory findings - Overlap and coordination issues: - Overlap between Financial Services Committee (FSC) and Bank of Korea (BOK) responsibilities hampers effective regulation, supervision, and oversight of KRX CCP and KSD. - Formal cooperation between BOK and FSC at the highest level has not been used to discuss FMIs; technical cooperation is informal without adequate agreements. - Need for a crisis management framework allowing timely coordination in case of operational or financial crisis. - Recommendations to improve framework (summary): - Formalize cooperation between BOK and FSC at technical levels (e.g., via a Memorandum of Understanding (MOU)); ensure BOK can confirm authenticity/completeness of information from FMIs and enable BOK and FSC to “speak with one voice”. - Amend statute to provide BOK with enforcement tools to discharge oversight responsibilities effectively, including over linked FMIs and participants. - Increase FSC resources: current workload too large for one staff member given topic complexity and two-year rotation policy. --- ### BOK-Wire+ — Participants, access, accounts, liquidity, and operations ### Participants and access model - Participants include local and foreign banks, insurance companies, securities dealers and brokers, government agencies, and the Continuous Linked Settlement (CLS) bank; all must open current accounts with the BOK. - Participation standards: - Capital/solvency thresholds: - Banks, comprehensive financial company and securities finance company: capital adequacy ratio against risk-weighted assets should be over 8 percent. - Financial investment company: net capital ratio should be over 150 percent. - Insurance companies: RBC ratio should be over 100 percent. - Activity and staffing: monthly average usage should be above 50 transactions for one year after participation; a total of 4 personnel should be exclusively devoted to BOK-Wire+ operations at the member’s end. - Tiered participation: - June 2010: BOK implemented a tiered participation model; indirect participants send/receive large-value transfers through direct participants. - Currently there are 12 indirect participants in BOK-Wire+. - BOK reviews participant access criteria annually. ### Account types and settlement usage - Participants hold two account types: - Current account: used for RTGS settlement; used for BOK loans, government/public bond transactions, CLS and retail payment system settlements. - Deposit account for settlement: used in hybrid system for general fund transfers, short-term interbank lending/borrowing, cash leg of securities transactions. - Cash leg of most securities transactions, except general bonds, is settled in BOK-Wire+. - Cash payments following derivatives transactions are settled in the books of six commercial banks (settlement banks) which also act as custodian banks for cash collateral. ### Liquidity provision and intraday credit - BOK provides intraday credit through intraday overdrafts and intraday repo in BOK-Wire+. - BOK is sole issuer of legal tender in Korea and can promptly intervene to provide loans to participants to prevent settlement delays. - Participants’ intraday settlement liquidity needs reduced considerably since BOK-Wire+ introduction. - Liquidity adjustment loan: an overnight standing facility provided by the BOK with its interest rate pegged above the Base Rate depending on the day the loan is taken. ### Queuing arrangements and processing rules - RTGS component: payment orders processed using bypass FIFO (first in, first out) rule. - Hybrid component: participants can change priority of messages from urgent to normal and vice versa. - Other transactions (netted retail payment system settlements, receipt of treasury funds, redemptions of short-term loans with specified maturities) are processed and settled at designated times. - Differential pricing fees mechanism in place to encourage early submission and smooth payment flows. ### Settlement methods (summary from Table 1) - RTGS system (Current account) — Applicable transactions: - CLS fund transfers; Designated-time net settlements; Issuances and redemptions of government and public bonds; BOK loans; Funds transfers between participants after 5.30 pm to repay intraday overdrafts. - Settlement mechanism: RTGS. - Hybrid system (Deposit account for settlement) — Applicable transactions: - General fund transfers (including third-party fund transfers); Short-term interbank lending/borrowing; Cash leg of securities transactions (including BOK repo transactions). - Settlement mechanism: RTGS, bilateral and multilateral offsetting. ### Participation monitoring, suspension and exit - Director general of payment and settlement systems conducts annual participant assessment. - Suspension/cessation procedures stipulated in ROMPSS and WROMPSS and publicly disclosed on BOK webpage. - Recommendation: BOK may consider seeking a periodical statement from direct participants confirming they limit transactions on behalf of indirect participants to available funds. --- ### KRX markets and volumes (selected statistics) ### Markets overview - KRX operates KOSPI (main securities market) and KOSDAQ (market for small and medium-sized businesses). - End of 2012: total of 1,784 companies listed at the KRX representing a market capitalization of USD 1,179 billion. - Listing/trading of foreign shares in 2012: 17 foreign companies, representing a trading volume of USD 4 billion. - KRX DM: opened in 1996; index futures and options introduced in 1996 and 1997; DM was largest derivatives market worldwide for stock index options in 2012. ### Table excerpts (2012 volumes) - Government securities: Nr of Transactions 3.5 million; Value of Trading 1,120 billion USD; Percent of GDP 98; Nr of Listed Instruments 4,619 - Corporate bonds: Value of Trading 6 billion USD; Percent of GDP 0.5; Nr of Listed Instruments 5,628 - Shares: Nr of Transactions 1.218 million; Value of Trading 1,518 billion USD; Percent of GDP 133; Nr of Listed Instruments 1,784 - ETF: Nr of Transactions 0.03 million; Value of Trading 120 billion USD; Percent of GDP 11; Nr of Listed Instruments 135 - Securitized derivatives: Value of Trading 0.05 billion USD; Percent of GDP 0.0; Nr of Listed Instruments 3,896 ### Derivatives volumes (Table 3 excerpts, 2012) - Stock index options: Nr of Contracts Traded 1,5755,066445 million; Rank World 1 - Stock index futures: Nr of Contracts Traded 627,071621 million; Rank World 9 - Single stock futures: Nr of Contracts Traded 100535 million; Rank World 5 - Interest rate futures: Nr of Contracts Traded 434,110361 million; Rank World 8 - Commodities futures: Nr of Contracts Traded 0.020.10.0 million; Rank World 16 - Currency futures: Nr of Contracts Traded 5455148 million; Rank World 5 (Note: table figures reproduced exactly as presented in source.) --- ### KRX-CCP — Systemic importance, risk management, and organization ### Systemic importance and exposures - KRX CCP clears all products traded on KRX securities and derivatives markets; no alternative CCP operational within Korea. - Values cleared relative to GDP: - KRX stock markets: factor 1.3 - Government bond market: factor of nearly 1 - Stock index option market: factor 4.4 - Stock index future market: factor of 6.2 - Systemic importance will increase with introduction of OTC derivatives clearing. ### Organizational structure and governance - CCP integrated into KRX legal entity; clearing and settlement department, risk management team and membership team manage CCP activities. - Risk management committee at board level approves risk policies and sets risk limits. - Ownership structure (as reported): - Treasury stock 4.62 percent; - Members (36 firms) 88.17 percent; and - Market-related organizations (3 firms) 7.21 percent. - Board composition: chairman (also CEO), chairman of market oversight commission, 5 senior executive directors and 8 non-executive directors. - Governance gaps: - Risk management committee chaired by an executive director (not fully independent). - Risk management team small (5 experts) relative to responsibilities. - Company objectives do not explicitly prioritize CCP safety/efficiency or financial stability. ### Risk management framework and resources (credit, margin, collateral) - Credit risk controls: - KRX monitors credit exposures per clearing account in real time; uses margin, joint compensation fund (JCF) contributions and settlement reserves. - Joint compensation fund total size per market: KRW 200 billion. - Basic contribution per member: KRW 1 billion. - Derivatives margin (COMS): - Margin model: 99.7 confidence level and 2-day close-out period for initial margin. - Initial margin determined per product group based on maximum net loss. - Variation margin collected daily at noon on T+1. - Operational limitation: CCP lacked capacity to make intraday margin calls (plans to implement intraday margin calling in 2014). - Securities market: - No margin currently collected; potential losses covered by joint compensation fund. - Joint compensation fund size defined in regulations; KRX cannot adapt fund size in a timely manner. - Model validation and testing: - No independent validation of margin and credit risk models by an independent entity. - Back testing and sensitivity analysis plans in 2013; not fully implemented at time of assessment. - Recommendation: ensure models reviewed at least annually by qualified independent entity; implement back testing and sensitivity analysis. ### Collateral management - Eligible collateral includes domestic and foreign cash, listed bonds, U.S. government bonds and listed securities. - Collateral marking: - Marked to market daily for most collateral; bonds marked weekly. - Haircuts (set by asset class): - 20–40 percent for listed stocks, including ETFs and DRs; - 5–20 percent for listed bonds; - 5 percent for foreign currency; - Treasury bills with maturity of 1 year or less: 8 percent; - Treasury notes with maturity of 10 years or less: 12 percent; - Treasury bonds with maturity of 10 years or more: 16 percent. - Concentration: - No regulatory collateral concentration limits currently; planned collateral-weight monitoring function in next-generation system scheduled for February 2015. - Recommendations: - Develop concentration limit policy; mark bonds to market daily; implement stress tests for haircuts. ### Liquidity risk and resources - Liquid resources: committed credit lines, settlement reserves and joint compensation fund. - Liquidity providers and credit lines: - Lines of credit with KSFC and three commercial banks; FX credit line with Korea Exchange Bank for FX derivatives. - Liquidity provider criteria: capital amount more than KRW 8.0 trillion; capital ratio at least 10 percent; delinquency rate less than 4 percent. - Stress testing: - Daily and monthly stress tests; KRX stress tests liquidity needs daily and monthly and reports quarterly to risk management committee. - KRX does not stress liquidity needs for foreign currencies due to low foreign currency settlements. - Recommendations: - Implement stress testing for foreign currencies; increase criteria and monitoring for settlement banks. ### Settlement finality, settlement media, and settlement bank arrangements - Finality: - Securities settlements are final as soon as settlement account debited/credited in real time during settlement day. - Derivatives transactions final when KRX determines net obligation per clearing member. - Debt Rehabilitation and Bankruptcy Act protects KRX against insolvency proceedings following bankruptcy of a clearing member. - Settlement media: - Securities market: central bank money via BOK-Wire+. - Derivatives market: commercial bank money via six commercial banks (majority of clearing members lack direct access to BOK-Wire+). - Settlement bank criteria and monitoring: - Selection criteria limited: regulated/supervised and capital ratio at least 8 percent. - KRX monitors compliance monthly. - Contracts with settlement banks have no expiration date. - Recommendations: increase settlement bank requirements; consider expiration dates in contracts; consider central bank money for derivatives. ### Default management, segregation and portability - Default framework: - Default rules and procedures exist, with a defined risk management waterfall and discretionary powers. - Default manual tested annually with key stakeholders. - Historical precedent: Lehman Brothers Securities Seoul branch default in September 2008 handled via purchases and liquidation. - Segregation and portability: - Account structures segregate clearing member proprietary assets from customer assets. - KRX cannot monitor individual client positions during normal business but can ensure timely transfer of customer accounts in crisis. - Recommendation: extend portability arrangements for the securities market to align with derivatives market portability rules. ### Operational risk, business continuity and RTO - Operational framework: - Operational risk management regulation introduced early 2013; RCSAs and KRIs in place. - BCP in place with primary/secondary/third sites; BCP regularly tested. - Recovery Time Objective: - RTO is 3 hours (regulatory requirement), which allows same-day settlement but not fully aligned with PFMI recommended RTO of 2 hours. - Recommendation: adapt regulatory framework to accommodate an RTO of 2 hours. ### Disclosure and standards - Disclosure: - KRX completed CPSS-IOSCO Disclosure Framework and published responses. - Rules and statistics available on website in Korean; various rules available in English but not exhaustive. - Recommendation: disclose all rules, regulations and guidelines in English. - Communication standards: - KRX uses proprietary communication network and proprietary message protocols; conversion to internationally accepted standards technically possible but costly. - Recommendation: adopt internationally accepted communication procedures to increase straight-through-processing and reduce manual interventions. ### Ratings summary (KRX-CCP) - Observed: 1, 7, 8, 9, 10, 12, 13, 14, 15, 17, 18, 21, 23 - Broadly observed: 2, 3, 5, 6, 16, 19, 22 - Partly observed: 4 - Not observed: - - Not applicable: 11, 20, 24 --- ### Authorities, responsibilities, and recommended reforms ### Key findings on authorities and coordination - FMIs in Korea are regulated and overseen by BOK and FSC/FSS; legal responsibilities suggest overlap. - BOK oversight powers effective for BOK-Wire+ but limited to ensure implementation of suggestions by FMIs regulated by FSC or to verify authenticity/completeness of FMIs’ information. - FSC and FSS powers considered sufficient; FSC resources considered insufficient. - High-level cooperation exists but technical-level cooperation is informal and lacks adequate agreements; no crisis management arrangements exist. ### Priority recommendations for authorities - Formalize cooperation between BOK and FSC (e.g., MOU) to: - Enable technical and management-level cooperation and joint assessments. - Enable BOK to confirm authenticity/completeness of information submitted by FMIs. - Ensure BOK and FSC “speak with one voice” to KRX and KSD. - Allow FSC to benefit from information obtained by BOK in international fora and FMI meetings. - Increase powers of the BOK: - Amend existing statute to provide BOK with enforcement tools to effectively discharge oversight responsibilities, including over linked FMIs and participants. - Increase FSC resources: - Extend number of staff responsible for clearing and settlement matters to allow proactive, complete analysis and cooperation with the FSS. - Improve disclosure in English: - BOK, FSC and FSS should make relevant FMI information available in a language commonly used in financial markets in addition to domestic language. ### Selected prioritized actions (from recommendations list) - BOK-Wire+: - Increase frequency of review of haircut methodology and include independent annual validation (Short-term, medium priority). - Amend ROMPSS and WROMPSS to explicitly define settlement finality and revocation rules (Medium-term, medium priority). - Develop holistic BCP addressing simultaneous disruption of more than one FMI (Short-term, high priority). - Use CPSS-IOSCO disclosure framework and provide information in English (Short-term, medium priority). - KRX-CCP: - Explicitly distinguish trading and CCP activities in legal/regulatory framework and improve English disclosure (Medium-term, medium priority). - Ensure independence of risk management committee and increase risk-management staff (Short-term; high priority). - Develop recovery plan in line with PFMI and CPSS/IOSCO guidance (Short-term, high priority). - Reform securities market credit risk management to collect daily risk-based collateral and remove fixed-size joint compensation fund requirement (Short-term/Medium-term, high priority). - Implement intraday margin arrangements and validate margin models independently at least annually (Short-term/Medium-term, high priority). - Implement collateral concentration limits, daily mark-to-market for bonds, and stress tests for haircuts (Medium-term, high priority). - Increase requirements and monitoring of settlement banks; consider contracts with expiration dates (Short-term/Medium-term, high priority). --- ### Procedural and methodological notes - Self-assessments: - BOK conducted a self-assessment of BOK-Wire+. - FSC conducted a self-assessment of KRX-CCP. - Both self-assessments based on the PFMI and included assessment of authorities’ responsibilities. - Limitation: - Not all information was available in English; not all references could be fully verified. *Source: IMF staff assessment (EXECUTIVE SUMMARY) and related sections from the provided PDF content unit (information available in July 2013).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Introduction and assessment scope - Assessment conducted in the context of the IMF’s Financial Sector Assessment Program (FSAP) to the Republic of Korea in April and July 2013. - Assessors: Gynedi Srinivas (World Bank’s Payment Systems Development Group) and Froukelien Wendt (IMF’s Monetary and Capital Markets Department). - Scope: assessments of BOK-Wire+ and the KRX CCP against the Principles for Financial Market Infrastructures (PFMI); assessment of authorities (BOK, FSC, FSS) using responsibilities for authorities of FMIs. - Information base: national laws, regulations, rules, procedures, annual reports, self-assessments, IMF questionnaire responses, websites, and meetings with BOK, FSC, FSS, KRX, KSD, and stakeholders. - Assessment based on information available in July 2013; information after July 2013 not taken into account. ### Overview of Korea’s payment, clearing, and settlement landscape - Major infrastructure elements: - BOK-Wire+ — real-time interbank gross payment and settlement system, owned and operated by the Bank of Korea (BOK). - KRX — main securities and derivatives market operator, operating three exchanges: KOSPI, KOSDAQ, and the derivatives market (DM); provides CCP services for these markets; majority stake in KSD (CSD/SSS). - Historical milestones and market facts: - KRX opened for trading in 1956 with 12 listed companies. - Continuous trading introduced in 1975; automated order-routing in 1983. - BOK operated BOK-Wire since December 1994. - Plan to upgrade BOK-Wire launched in May 2005; BOK-Wire+ replaced BOK-Wire in 2009. - Futures and options available since 1996 and 1997, respectively. - In 2012, KRX ranked: - number one by number of stock index option contracts traded in the world, - number five measured in value of bond trading, - number eight in value of share trading. - Ongoing/planned initiatives: - Authorities decided to introduce a CCP for OTC derivatives in 2014. - Discussions ongoing on transforming current trade reporting systems into full-fledged trade repositories (TRs). ### BOK-Wire+: status and key findings - Overall assessment: BOK-Wire+ is largely compliant with the PFMI and is overall sound. - Operational and legal features: - Hybrid RTGS with continuous bilateral and multilateral offsetting mechanisms. - Used for settlement of short-term financial transactions, cash leg of securities transactions, KRW leg of foreign exchange settlement, retail payment systems, BOK monetary policy operations, and issuance/redemption of government and public bonds. - All transactions once settled in BOK-Wire+ are deemed final and irrevocable. - Debtor Rehabilitation and Bankruptcy Act (enacted in 2006) stipulates transactions settled in BOK-Wire+ are exempt from bankruptcy proceedings. - Strengths: - Comprehensive and transparent risk management frameworks: clear policies and guidelines, governance arrangements, operational systems. - Regularly tested default and business continuity procedures. - Areas for improvement (recommendations summarized): - Improve collateral risk management: - adopt regular testing of haircuts; - conduct independent validation of haircut procedures at least annually. - Clarify regulations regarding settlement finality and queue management, particularly revocation of queued transactions. - Fully implement the disclosure framework, including disclosure of relevant rules and regulations in English. - Strengthen BOK oversight powers to include linked FMIs and participants, particularly to obtain authentic information and enforce compliance. ### KRX-CCP: status and key findings - Role and systemic importance: - CCP contributes to safety and efficiency of securities and derivatives market but concentrates systemic risk. - KRX offers CCP services for KOSPI, KOSDAQ, and DM; majority stake in KSD. - Recent improvements: - Introduction of intraday margin calls. - Implementation of back testing and sensitivity analysis (require further implementation). - Increased sizes of joint compensation fund and settlement reserves. - Introduction of operational risk management system in January 2013. - Key deficiencies and recommendations related to credit risk management and governance: - Credit risk management: - Reform securities market credit risk framework by collecting risk-based collateral (margin) on a daily basis to cover KRX exposures between transaction and settlement days. - Reconsider design of joint compensation funds, particularly removing the fixed size requirement to better adapt to increased exposures. - Increase criteria for settlement banks and custodians. - Review and validate KRX’s risk management framework, particularly its margin model, by an experienced and independent entity (e.g., academic or consultant). - Governance and staffing: - Improve independence of the KRX risk management committee (currently chaired by an executive director who also has strategy and planning responsibilities). - Increase staff size responsible for management of credit and liquidity risk; current staffing small relative to responsibilities. - Increase KRX focus on safety and efficiency of the CCP and on financial stability in company objectives. - Recovery planning: - Maintain viable recovery plans with preventive measures for restoring CCP’s ability to operate as a going concern. - Identify critical operations to continue during crisis. - Develop crisis scenarios beyond default procedures and BCPs, including extreme but plausible events (example: default of a large participant that is part of a financial group providing multiple services combined with a decrease in value of widely used collateral). ### Authorities, regulatory structure, and supervisory findings - Overlap and coordination issues: - Overlap in responsibilities between the Financial Services Committee (FSC) and the Bank of Korea (BOK) hampers effective regulation, supervision, and oversight of the KRX CCP and KSD. - Formal cooperation between BOK and FSC at the highest level has not been used to discuss FMIs. - Technical cooperation is informal without adequate agreements to support effective BOK oversight. - Need for a crisis management framework allowing timely coordination in case of operational or financial crisis. - Recommendations to improve regulatory and oversight framework: - Formalize cooperation between BOK and FSC at technical levels (e.g., FSC capital markets division and BOK payment systems policy team), potentially via a Memorandum of Understanding (MOU). - Ensure BOK can confirm authenticity and completeness of information submitted by FMIs. - Enable BOK and FSC to “speak with one voice” in communications to KRX and KSD. - Allow FSC to benefit from information obtained by BOK in international fora and FMI operations council meetings. - Increase powers of the BOK: - Amend existing statute to provide BOK with enforcement tools to effectively discharge oversight responsibilities, including over linked FMIs and participants. - Increase resources of the FSC: - Current workload considered too large for one staff member given topic complexity and two-year rotation policy. - Additional resources to support proactive policy approach and more effective guidance of the Financial Supervisory Service (FSS). ### Procedural and methodological notes - Self-assessments: - BOK conducted a self assessment of BOK-Wire+. - FSC conducted a self assessment of KRX-CCP. - Both self assessments based on the PFMI and included assessment of authorities’ responsibilities. - Limitation: - Not all information was available in English; not all references could be fully verified. *Source: IMF staff assessment (EXECUTIVE SUMMARY), based on information available in July 2013.* ### 11. Participants in the BOK-Wire+ are both banks and nonbanks who must open current ### _cr14308 - 11. Participants in the BOK-Wire+ are both banks and nonbanks who must open current ### Participants and access model - Participants include local and foreign banks, insurance companies, securities dealers and brokers, government agencies, and the Continuous Linked Settlement (CLS) bank; all must open current accounts with the BOK. - Participants should be financially sound, devote an adequate number of staff to BOK-Wire+ operations, and generate sufficient volumes. - Participant requirements are laid down by the governor of the BOK in line with principles set out by the monetary policy committee (MPC), the ultimate decision-making body. - June 2010: the BOK implemented a tiered participation model in BOK-Wire+; indirect participants send and receive large-value transfers through direct participants. - The BOK reviews the participant access criteria on an annual basis. ### Account types and settlement usage - Participants hold two types of accounts: - Current account: used for settlement of transactions in the RTGS system; used for fund transfers for BOK loans, government and public bond transactions, and CLS and retail payment system settlements. - Deposit account for settlement: used in the hybrid system for general fund transfers, short-term interbank lending/borrowing, and the cash leg of securities transactions. - Cash leg of most securities transactions, except for general bonds, is settled in the BOK-Wire+ system. - Cash payments following derivatives transactions are settled in the books of six commercial banks (settlement banks) which also act as custodian banks for cash collateral. ### Liquidity provision and intraday credit - The BOK provides intraday credit through intraday overdrafts and intraday repo in BOK-Wire+. - The BOK is the sole issuer of legal tender in Korea and can promptly intervene to provide loans to participants to prevent delays in settlement caused by temporary liquidity shortages. - Participants’ intraday settlement liquidity needs have reduced considerably since the introduction of BOK-Wire+. - Liquidity adjustment loan: an overnight standing facility provided by the BOK with its interest rate pegged above the Base Rate depending on the day on which the loan is taken by the participant. ### Queuing arrangements and processing rules - RTGS component: payment orders processed using bypass FIFO (first in, first out) rule. - Hybrid component: participants can change priority of messages from urgent to normal and vice versa to facilitate settlement. - Other transactions (netted retail payment system settlements, receipt of treasury funds, redemptions of short-term loans with specified maturities) are processed and settled at designated times. ### Summary of settlement methods in BOK-Wire+ (from Table 1) - RTGS system (Current account) — Applicable transactions: - CLS fund transfers - Designated-time net settlements - Issuances and redemptions of government and public bonds - BOK loans - Funds transfers between participants after 5.30 pm to repay intraday overdrafts - Settlement mechanism: RTGS - Hybrid system (Deposit account for settlement) — Applicable transactions: - General fund transfers (including third-party fund transfers) - Short-term interbank lending/borrowing - Cash leg of securities transactions (including BOK repo transactions) - Settlement mechanism: RTGS, bilateral and multilateral offsetting ### KRX securities and derivatives markets (overview and key statistics) - KRX operates two securities markets: KOSPI (main securities market for stocks and bonds) and KOSDAQ (dedicated market for small and medium-sized businesses). - End of 2012: a total of 1,784 companies listed at the KRX representing a market capitalization of USD 1,179 billion. - Listing and trading of foreign shares in 2012: 17 foreign companies, representing a trading volume of USD 4 billion. - KRX DM (Derivatives Market) was the largest derivatives market worldwide for stock index options in 2012. DM opened in 1996; index futures based on KRX KOSPI 200 introduced in 1996, KOSPI 200 options in 1997, government bond futures and US dollar derivatives in 1999. - Table 2 excerpts (2012 volumes): - Government securities: Nr of Transactions 3.5 million; Value of Trading 1,120 billion USD; Percent of GDP 98; Nr of Listed Instruments 4,619 - Corporate bonds: Value of Trading 6 billion USD; Percent of GDP 0.5; Nr of Listed Instruments 5,628 - Shares: Nr of Transactions 1.218 million; Value of Trading 1,518 billion USD; Percent of GDP 133; Nr of Listed Instruments 1,784 - ETF: Nr of Transactions 0.03 million; Value of Trading 120 billion USD; Percent of GDP 11; Nr of Listed Instruments 135 - Securitized derivatives: Value of Trading 0.05 billion USD; Percent of GDP 0.0; Nr of Listed Instruments 3,896 - Table 3 excerpts (2012 derivatives volumes): - Stock index options: Nr of Contracts Traded 1,5755,066445 million; Rank World 1 - Stock index futures: Nr of Contracts Traded 627,071621 million; Rank World 9 - Single stock futures: Nr of Contracts Traded 100535 million; Rank World 5 - Interest rate futures: Nr of Contracts Traded 434,110361 million; Rank World 8 - Commodities futures: Nr of Contracts Traded 0.020.10.0 million; Rank World 16 - Currency futures: Nr of Contracts Traded 5455148 million; Rank World 5 ### KRX-CCP systemic importance and risk management - The KRX CCP clears all products traded on KRX securities and derivatives markets and is of systemic importance to Korea's financial system. - A default of the KRX CCP could highly disrupt domestic financial markets; no alternative CCP is operational within Korea. - Values cleared relative to GDP: - KRX stock markets: factor 1.3 - Government bond market: factor of nearly 1 - Stock index option market: factor 4.4 - Stock index future market: factor of 6.2 - The systemic importance of KRX CCP will further increase with introduction of OTC derivatives clearing. - KRX CCP roles: guarantee settlement in case of participant default, assume settlement obligations, perform multilateral trade netting, confirm settlement of funds and securities under FSCMA. - Risk management framework: - Participation requirements for clearing members stricter than for trading members. - Securities market potential losses: covered by joint compensation fund for securities and settlement reserves. - Derivatives market potential losses: covered by margin, joint compensation fund for derivatives, and settlement reserves. - Joint compensation fund consists of contributions from clearing members; settlement reserves are KRX funds dedicated to cover potential losses from the guarantee function. - Organizational structure: - CCP integrated into KRX legal entity; clearing and settlement department, risk management team, and membership team manage CCP activities. - Risk management committee at board level approves risk policies and sets risk limits. ### KRX, KSD, and OTC clearing developments - KSD is the sole CSD in Korea, established under the FSCMA, and is the SSS and CSD for KRX-listed securities and OTC trades. - 2012 OTC traded stocks value: USD 999 billion (approximately two-thirds of exchange traded stocks). - 2012 OTC bond value: more than USD 6 trillion. - Since 2013 the KSD acts as CCP for institutional settlements in OTC traded stocks, bonds, repos, and securities lending. - A reform agenda for OTC derivatives clearing: task force established February 2010; instruments most likely for CCP clearing are interest rate swaps. - FSC completed legislative process in July 2013; launch date of the OTC derivatives CCP expected in 2014. ### Settlement procedures and DVP models (Table 4 highlights) - Settlement cycles and DVP models for KRX/KSD instruments: - Stocks (KOSPI/KOSDAQ): Settlement day T+2; DVP model DVP3 - Government bonds: Settlement day T+1; DVP model DVP3 (T+0 for repos noted) - General bonds: Settlement day T+0; DVP model DVP3 - Institutional stocks (OTC institutional transactions): Settlement day T+2 using DVP model 2 - OTC bonds: Settlement day T+1 using DVP model 1 - Other stocks (OTC): Settlement day T+2 using DVP model 2 - All securities settlement is conditional upon payment of the cash. ### Regulation, supervision, and oversight - KRX regulated, supervised and overseen by the FSC and BOK based on statutory law; FSC supervision based on FSCMA. - KRX needs FSC approval to amend its regulations; FSC empowered to use disciplinary measures as described in FSCMA. - Bank of Korea Act (BOK Act) stipulates BOK's principal role in overseeing payment and settlement systems; BOK Act provides legal ground for BOK to collect information, perform assessments, request improvement, and monitor payment and settlement systems. - FSC may request the FSS to conduct inspections; FSS may inspect business, financial status, books, documents related to KRX and report results to FSC. FSS may advise FSC on disciplinary measures if KRX violates rules. ### Key findings and follow up for BOK-Wire+ (General organization and governance) - Legal and regulatory framework: - BOK has a well-founded and clear legal and regulatory framework governing BOK-Wire+ and participants' rights and obligations (BOK Act and relevant regulations). - Rules and regulations are enforceable and in accordance with relevant acts; jurisdiction: Korea. - Recommendation: insert an explicit clause stating settlement through BOK-Wire+ is final (the ROMPSS, or Regulation on Operation and Management of Payment and Settlement Systems, currently provides an implicit understanding). - Recommendation: BOK could better articulate legal basis by providing hyperlinks or placing relevant acts and regulations on its payments systems webpage. - Governance and oversight: - BOK's commitment to safety and efficiency is laid down in article 81 (1) of the BOK Act; support for financial stability in article 1; articles read with article 28 reinforce objectives of safety, efficiency, and financial stability. - Risk management decisions related to BOK-Wire+ are taken by or reported to the MPC. - Internal audit audits BOK-Wire+ operations; National Assembly and the board of audit and inspection also audit operations. - A consultative committee of participants meets at least twice a year to discuss risk management, business procedures, IT standardization, and fees. - When the BOK changes major payment and settlement policies, it must notify relevant institutions, collect opinions, place revised policies on the BOK website, and notify participants; changes are reflected in the annual payment and settlement systems report. - Recommendation: consider including governance issues as a separate chapter in the annual payment and settlement systems report. - Interdependencies and business continuity: - Main risk identified: interdependency between systemically important FMIs in Korea (BOK-Wire+, KRX systems, CLS, retail payment systems) and their participants; ultimate settlements of other FMIs conducted in BOK-Wire+. - Operational disruptions in BOK-Wire+ could cause credit and liquidity risks; delays and operational disruptions in other FMIs could pose risks to BOK-Wire+ (pending payment instructions, queue management, extension of operating hours). - Emergency response committee is set up if needed; BCP is reviewed annually. - BCP for BOK-Wire+ deals with 12 potential scenarios and considers nonavailability of systems of operators of FMIs (KRX, KSD, KFTC) on a system-by-system basis. - Recommendation: develop additional scenarios addressing simultaneous disruption of more than one FMI. _Italic: Source: _cr14308 - 11. Participants in the BOK-Wire+ are both banks and nonbanks who must open current (PDF chapter/section)._ ### 31. The BOK’s exposure to credit risk is limited as it provides intra-day credit to ### 31. The BOK’s exposure to credit risk is limited as it provides intra-day credit to ### Collateral and credit risk (BOK) - BOK provides intra-day credit to participants on a fully collateralized basis; collateral management system is operated through a link with the KSD, which keeps the government securities that the BOK accepts as collateral. - Accepted collateral: - Are subject to a haircut. - Have low credit and market risks. - Are highly liquid. - Gaps and recommendations: - Details regarding testing the sufficiency of the haircut, stress-testing, and pro-cyclicality are not available. - Details of any independent validation taking place on an annual basis are not available. - Recommendation: increase the frequency of the review of the haircut methodology taking into account testing sufficiency, stress-testing, and pro-cyclicality, including an independent validation of the methodology on an annual basis. - Recommendation: stress testing scenarios should include adverse market conditions in line with the PFMI requirements. ### Liquidity risk (BOK-Wire+) - Liquidity mitigation measures: - Provision of an intraday liquidity facility by the BOK to participants in the BOK-Wire+ system. - Hybrid settlement system significantly reduced participants’ liquidity needs. - BOK monitors settlement and payment flows in real time and initiates measures if required. - Differential pricing fees mechanism contributes to smoothening payment flows throughout operating hours. - Concentration and follow-up: - There is a concentration of settlement transactions after 4.00 pm due to incoming settlements from the KRX, and settlement of call loans and repo transactions (principal sources of liquidity for Financial Investment Companies (FICs)). - Recommendation: undertake an impact study on the impact of differential pricing on payment flows. ### Settlement finality and rules (Principles 8–10) - Operational facts: - Settlement of payment transfers in BOK-Wire+ is achieved in real-time; payments once settled are final and irrevocable; cash settlement happens in central bank money. - BOK-Wire+ provides for finality of settlement as set out in article 5 of the relevant BOK-Wire+ regulation. - Issues and recommendations: - The regulation and working regulation do not explicitly define the point at which settlement is deemed final; provisions in article 5 are implicit. - Participants can cancel/revoke a payment instruction placed in a queue; revocation/cancellation can only be done with the consent of a pre-arranged funds beneficiary institution. - Recommendation: amend relevant articles in the regulation and working regulation to explicitly define and emphasize settlement finality and revocation rules. - Note: The regulation and working regulation are respectively the ROMPSS and the Working Regulation on Operation and Management of Payment and Settlement Systems (WROMPSS). ### Central securities depositories and exchange-of-value settlement systems (Principles 11, 12) - DVP and PVP: - DVP and payment versus payment (PVP) settlement mechanisms are used for settlement of securities and foreign exchange transactions respectively in central bank money in BOK-Wire+. - Adoption of these forms of settlement has led to the elimination of principal risk. ### Default management (Principles 13, 14) - BOK has rules and procedures governing disposal of collateral of a defaulting participant with respect to intra-day liquidity facilities. - These rules and procedures are publicly available on the BOK webpage. - When rules/procedures are revised, BOK reflects opinions of relevant institutions and provides guidance to participants through BOK-Wire+ before the date of effect. ### General business and operational risk management (Principles 15–17) - Operational risk framework: - Comprehensive operational management guidelines cover technology, risk factors, human resources, monitoring, control, and periodical testing. - Recovery time objective (RTO) is 2 hours. - BCP developed in line with relevant regulation, working regulation and sub-regulations and deals with 12 potential scenarios. - BCP scenarios consider nonavailability of systems of other FMIs (KRX, KSD, KFTC) on a system-by-system basis. - Recommendation: - Develop a more holistic approach that considers a disaster scenario when operations of more than one FMI are disrupted. - Oversight of KSD: - KSD is assessed once every two years by BOK as part of its oversight activity. - Recommendation: given the critical nature of the FMI, BOK could consider assessing the FMI at more frequent intervals. ### Access (Principles 18–20) - Access criteria: - BOK-Wire+ has fair and open access criteria considering participant risk management capability, stable and efficient operation of BOK-Wire+, and possibility of systemic risk. - Tiered participation arrangements in place; risks of indirect participation are very small because scope is limited and transactions of indirect participants can be identified and monitored in real time. - Monitoring gap and recommendation: - It is not clear how BOK monitors that direct participants are putting through transactions on behalf of indirect participants limited to availability of funds in indirect participants’ account with direct participant. - Recommendation: BOK may consider seeking a periodical statement from direct participants confirming this monitoring. ### Efficiency and transparency (Principles 21–24) - Efficiency: - Operational objectives in relevant regulations on BOK-Wire+ have been fulfilled. - BOK-Wire+ is operated efficiently; system design reflects needs of participants and financial markets. - Uses international standards for communicating with participants and messaging providers such as SWIFT to communicate with CLS bank. - Initiative to migrate to ISO 20022 message standards may be initiated and completed. - Transparency: - BOK-Wire+ regulation and sub-regulations are disclosed through BOK website; manuals and guidebooks provided to facilitate participants’ understanding. - BOK plans to use the disclosure framework published by the CPSS-IOSCO in December 2012. - Recommendation: make disclosed information and data available in a language commonly used in financial markets in addition to the domestic language. - Ratings summary (Table 5): - Observed Principles: 1,2,3,4,7,8,9,12,13,15,16,17,18,19,21,22 - Broadly observed: Principle 5 - Partly observed: Principle 23 - Not observed: (none listed) - Not applicable: Principles 6, 10, 11, 14, 20 and 24 --- ### E. Key Findings and Follow-up for the KRX-CCP ### General organization (Principles 1–3) - Legal framework: - Legal basis for the KRX-CCP is generally sound and enforceable. - The FSCMA and the KRX market regulations describe organization and responsibilities of the KRX. - Debt Rehabilitation and Bankruptcy Act provides statutory foundation for netting, set-off and closing out of positions. - High certainty that KRX regulations, procedures and contracts are enforceable in Korean jurisdiction. - A third country financial institution intending to apply for KRX membership must establish a local entity or branch to get a business license from the FSC as a financial investment trader or financial investment broker. - Improvements needed: - Regulatory framework could increase clarity; provisions for CCP clearing are currently comingled with KRX trading concepts. - Recommendation: use internationally used concepts, particularly those in the PFMI. - KRX has not developed a recovery plan; regulatory framework lacks explicit provisions that support recovery activities. - Governance: - Governance arrangements are transparent; roles/responsibilities of board and management are clearly described and publicly available. - Nonexecutive directors appointed to represent public interests. - KRX has a risk management committee and risk management department; risk management department reports to the board. - Governance gaps and recommendations: - Risk management committee is chaired by an executive director responsible for strategy and planning, and therefore not fully independent from business matters. - Risk management team and clearing and settlement department are small relative to responsibilities. - Recommendation: extend staff resources dedicated to risk management. - Recommendation: include safety and efficiency of the CCP as one of the objectives of the KRX and explicitly state that the KRX CCP intends to support financial stability. ### Risk management and recovery planning (Principles 4–7) - Risk framework: - Companywide risk management framework exists, with policies, tools, governance arrangements, and default procedures for credit, liquidity, operational, and market risks. - Framework recently implemented; business departments and market oversight must identify, monitor and manage risks. - Board decides on risk management limits; framework reviewed annually and includes risks related to external stakeholders (settlement banks, KSD, BOK). - Framework regularly assessed through independent audits. - Recovery planning gap: - KRX has not developed plans for recovery or orderly wind down. - Recommendation: decide which operations are critical, develop crisis scenarios beyond default procedures and BCPs, including extreme but plausible events (e.g., default of a large participant that is part of a financial group providing multiple services and simultaneous decrease in value of its collateral). - Concern: lack of recovery plan given systemic importance of KRX-CCP. ### Credit and liquidity risk management (Principles 4–7) - Monitoring and resources: - KRX has settlement risk management system monitoring credit exposures per clearing account in real time. - Derivatives credit risks are generally properly identified and monitored. - KRX manages credit risks by collecting margin, joint compensation fund contributions and allocating settlement reserves to cover credit losses. - Uses daily stress testing to determine sufficiency of financial resources in extreme but plausible conditions. - KRX has defined a risk management waterfall for the use of financial resources in case of credit losses; legal and regulatory framework supports it. - Margining (derivatives): - Margining system (Composite Optimized Margin System (COMS)) is based on internationally used margin models. - Margin model is risk based and comprises both initial and variation margin. - Initial margin is determined per product group based on the maximum net loss, calculated with a 99.7 confidence level and using a 2-day close-out period. - Scenarios for volatility margins are based on price changes in underlying assets and option volatility. - Offsets are allowed in a conservative way. - Current operational limitation: CCP does not have capacity to make intraday margin calls, although it has plans to implement intraday margin calling in 2014. - Securities market margining: - KRX has started developing a comprehensive risk management framework for the securities market and investigating introduction of securities margin due to large securities volumes and exposure between trading and settlement day. - Currently potential credit loss is covered by the joint compensation fund for the securities market. - Size of joint compensation fund is defined in regulations; KRX cannot adapt the fund size in a timely manner to accommodate increased exposures. - Model validation and other gaps: - Credit risk management models, including margin models, are not validated by an independent entity (regulator or external expert). - Models are not subject to back testing and sensitivity analysis; thus sufficiency of margin models cannot be assessed. - Concept of affiliated members is not yet considered in the credit risk management framework. - Risk management waterfall should better reflect PFMI suggestion that part of KRX capital should be taken before financial resources of surviving clearing members can be used ("skin in the game"). - Collateral management: - Clear policies on eligible collateral and tools to set and enforce conservative haircuts exist. - Recommendation: implement collateral limits. - KRX accepts a broad range of assets as collateral, including domestic and foreign cash, listed bonds, U.S. government bonds and listed securities. - In practice, majority of collateral is deposited in government bonds. - Collateral marking: - Marked to market daily, except bond securities which are marked to market on a weekly basis. - Recommendation: implement a stress testing framework for collateral. - Liquidity framework: - Effective liquidity risk management framework exists, consisting of a liquidity guideline and access to credit lines that are sufficiently large. - KRX can identify, measure, and monitor settlement and funding flows on an ongoing basis. - KRX stress tests liquidity needs daily and monthly and reports findings quarterly to the risk management committee. - KRX does not stress liquidity needs for foreign currencies due to low foreign currency settlements; can draw on an FX credit line with one of its liquidity providers if needed. - Liquidity providers must comply with specific criteria set out in KRX rules. - KRX does not rely on central bank money; its largest liquidity provider has a public profile and a triple A credit rating. ### Settlement (Principles 8–10) - Finality: - Securities settlements are final as soon as the settlement account has been debited or credited, which occurs real time during the settlement day. - Derivatives transactions are final as soon as KRX has determined the net obligation per clearing member following a transaction. - Debt Rehabilitation and Bankruptcy Act protects KRX against insolvency proceedings following bankruptcy of a clearing member. - Settlement media: - KRX conducts money settlements for the securities market in central bank money and for derivatives markets through commercial banks. - Main reason for using commercial bank money for derivatives: majority of clearing members active in derivatives trading do not have direct access to BOK-Wire+. - KRX uses accounts of six commercial banks to settle cash following derivatives transactions. - Selection and monitoring of settlement banks: - Limited set of criteria: banks should be regulated and supervised and have a capital ratio of at least 8 percent. - KRX monitors compliance with these criteria on a monthly basis. - KRX does not impose additional requirements such as creditworthiness, access to liquidity, and operational reliability. - Recommendation: increase requirements for settlement banks and monitor compliance regularly; consider including an expiration date in contracts with settlement banks to provide incentives to continue adequate services and reduce risks. - Gold derivatives (DM business): - DM business regulations and enforcement rules specify processes, procedures and controls to monitor and manage delivery process and associated risks related to physical delivery of gold derivatives. - KRX requests deposit of physical delivery margin to cover potential losses if a counterparty cannot fulfill delivery obligations. - Rules and procedures protect KRX against losses related to damage of gold bars. ### Central securities depositories and exchange-of-value settlement systems (Principles 11, 12) - KRX applies DVP arrangements for settlement of different products it clears, eliminating principal risk. - Different DVP models are used to ensure efficiency and accommodate needs of different markets and participants. ### Default management (Principles 13, 14) - Default framework: - KRX has developed default rules and procedures to manage a participant’s default and has appropriate discretionary power to implement these rules. - Rules include necessary actions to be taken, potential changes to normal settlement practices, treatment of proprietary and customer transactions and accounts, and activation of mechanisms such as an auction. - Default manual is tested on an annual yearly basis; key stakeholders are involved in testing. - Recommendations: - KRX rules and regulations could articulate certain key aspects more extensively, such as actions an FMI can take when a default is declared and the extent to which such actions are automatic or discretionary. - Internal plan should be reviewed by management and relevant board committees at least annually or after any significant changes to the FMI’s arrangements. *Source: _cr14308 - 31. The BOK’s exposure to credit risk is limited as it provides intra-day credit to* ### 59. Segregation and portability arrangements are in place for the securities and ### _cr14308 - 59. Segregation and portability arrangements are in place for the securities and ### Segregation and portability arrangements - Account structures of the KRX, KSD, settlement banks, and clearing members segregate the clearing member’s proprietary assets from its customer assets. - Segregation and portability arrangements are supported by the legal framework. Relevant laws and regulations are publicly disclosed. - The KRX cannot monitor individual client positions during normal business, but has the power to ensure timely transfer of customer accounts from a failing participant to another participant in times of crisis. - Recommendation: The CCP should extend its regulatory provisions on portability arrangements for the securities market and use similar rules for the securities market as are currently available for the derivatives market. ### General business and operational risk management (Principle 15–17) - The KRX has a system to identify potential general business risks, including risks related to the introduction of new products and services. - The KRX holds sufficient liquid net assets funded by equity to continue operations and services as a going concern if it incurs general business losses. - The KRX does not have a plan for recovery or orderly wind-down; therefore, no explicit link is drawn between the size of its liquid net assets and the length of time required to maintain critical operations and services. - Assets held to cover general business risk are of sufficient quality and liquidity. The KRX can raise additional equity if needed. - Recommendation: The potential recovery plan of the CCP should link the size of the available liquid net assets and the length of time requirement to maintain critical operations and services and should contain a reassessment of the sufficiency of the size of the settlement reserves. - The KRX holds its own and its participants’ assets at supervised and regulated entities, but should enhance monitoring of its custodians. - The KRX’s selection criteria for custodians and subsequent monitoring systems should be upgraded to ensure robust accounting practices, safekeeping procedures, and internal controls that fully protect assets held in custody. - The maximum allowed concentration of settlement flows is set at 60 percent; the KRX may analyze whether it can withstand the default of a custodian holding 60 percent of assets and adapt the percentage if needed. - The KRX’s investment strategy allows only investments in cash, government bonds and monetary stabilization bonds, supporting timely liquidation. - Recommendation: The KRX should disclose its investment policy in English. - The KRX has an operational risk management framework with systems, policies, procedures, and controls to identify, monitor, and manage operational risks. - Procedures ensure scalable capacity adequate to handle increasing stress volumes. Recently developed policies include physical and information security. - A BCP is in place, as well as a secondary and third site. The BCP is regularly tested with all relevant stakeholders. - Recovery time objective (RTO) is 3 hours, which allows for same day settlement, but is not fully in line with the prescribed RTO of 2 hours by the PFMI. ### Access (Principle 18–20) - Access criteria of the CCP allow for fair and open access to its services based on reasonable risk-related participation requirements. - KRX has publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that no longer meets participation requirements. - The current legal framework does not allow the KRX to monitor settlement positions of individual customers; the KRX is therefore not able to monitor positions at that level. - KRX regulations govern the relationship between its participants and its indirect participants. KRX can regularly identify indirect participants responsible for large positions in the DM market. - Recommendation: KRX should increase its possibilities to identify risks from tiered participation in the securities market. ### Efficiency (Principle 21, 22) - The KRX consults its participants on a regular basis and addresses their needs in the design of its services. - The CCP is subject to government audits aimed at ensuring efficiency of KRX’s operations. Fees and investments are subject to approval of a market efficiency committee. - KRX has mechanisms for regular review of its efficiency and effectiveness, such as customer satisfaction surveys. - The KRX does not use internationally accepted communication procedures and standards for communication with its clearing members, settlement banks, the KSD, and the BOK. - Conversion to internationally accepted communication procedures and standards is technically possible but costly. - Recommendation: The KRX should at least be able to accommodate the internationally accepted communication network and procedures to eliminate manual interventions, reduce risks, and increase efficiency by allowing for full straight through processing. ### Transparency (Principle 23, 24) - KRX recently disclosed responses to the CPSS-IOSCO Disclosure Framework for FMIs, enabling participants to assess risks they incur by participating in the CCP. - Rules and regulations are disclosed on the website in Korean; various rules and regulations are available in English as well. - Website contains statistics and descriptions of risk management and operational systems. KRX provides ad hoc training and information to its clearing members. Fees are publicly disclosed. - Recommendation: KRX should disclose all its rules, regulations and guidelines on its website in English. ### Ratings Summary of the KRX-CCP - Observed: 1, 7, 8, 9, 10, 12, 13, 14, 15, 17, 18, 21, 23 - Broadly observed: 2, 3, 5, 6, 16, 19, 22 - Partly observed: 4 - Not observed: - - Not applicable: 11, 20, 24 ### Key findings and follow up for authorities - FMIs in Korea are subject to regulation and oversight of the BOK and subject to regulation and supervision of the FSC and FSS. Legal responsibilities suggest overlap between regulators; this needs management through a consultative and cooperative framework (e.g., an MOU) to ensure effective coordination between the BOK and FSC. - Powers of the FSC and FSS are considered sufficient. Powers of the BOK are considered not to be effective: - The BOK may request other FMIs than the BOK-Wire+ to take measures and provide related information, but has no powers to ensure suggestions are implemented or to confirm authenticity and completeness of submitted information. - Recommendation: Amend existing statute to empower the BOK to obtain authentic information, oversee implementation of its observations/findings, and impose sanctions when required. - Resources: BOK and FSS resources are sufficient; FSC resources are considered insufficient. - FSC staff workload is too large for one staff member given two-year rotation; seconded KRX staff may prevent FSC from preparing independent opinions. - Recommendation: FSC should extend the number of staff responsible for clearing and settlement matters to allow proactive, complete analysis of KRX CCP compliance with relevant laws, regulations and the PFMI, and to allow more proactive cooperation with the FSS. - Disclosure: - Authorities disclose main laws and policies on FMIs, but further disclosure is recommended. - BOK should make disclosed information and data available in a language commonly used in financial markets in addition to the domestic language on its website. - FSC and FSS should provide dedicated information on FMIs on their websites. - PFMI implementation: - BOK and FSC have publicly announced support for the PFMI; further implementation is needed. - BOK implemented the PFMI as oversight framework for the BOK-Wire+, but application is incomplete due to regulatory overlap and the BOK’s lack of powers to see that its decisions are implemented by other FMIs. - FSC intends to adapt regulations under the FSCMA in accordance with the PFMI. FSC and FSS are in the process of approving regulations for OTC derivatives trading and clearing. Regulations for exchange traded stocks, bonds and derivatives have not yet been adapted to reflect the PFMI. - Cooperation shortcomings: - BOK and FSC do not appropriately cooperate in regulation, supervision and oversight of FMIs in Korea, particularly regarding KRX and KSD. - High-level cooperation has not been effective; technical-level cooperation is informal and without adequate agreements, impeding BOK oversight duties. - KRX must respond to requirements of two different regulating and supervising authorities that may be overlapping or contracting. - FSC cannot benefit from specific knowledge obtained by the BOK (e.g., from international meetings or FMI operations council). - No crisis management arrangements exist between authorities to manage a potential financial or operational crisis relating to FMIs in Korea. - Recommendation: Formalize cooperation between the BOK and the FSC regarding regulation, supervision and oversight of FMIs via a cooperative framework (e.g., an MOU) with a sound legal basis to: - Enable cooperation at appropriate technical and management levels and improve efficiency and effectiveness of regulation, supervision, and oversight, particularly for KRX CCP and KSD. - Enable the BOK to ensure its suggestions are implemented and to confirm authenticity and completeness of information submitted by FMIs. - Ensure the BOK and FSC “speak with one voice” to avoid inefficiencies in communication with the KRX and KSD. - Allow the FSC to benefit from relevant information obtained by the BOK during international meetings or meetings with the FMI operations council. *Source: IMF assessment text from the provided PDF content unit.* ### 75. The BOK and FSC should define arrangements regarding the frequency of their ### _cr14308 - 75. The BOK and FSC should define arrangements regarding the frequency of their ### Recommendations for the BOK-Wire+ - Priority recommendation: BOK and FSC should define arrangements regarding the frequency of their information exchange and plan joint meetings with the FSS, KRX, and KSD. Develop and test a crisis management plan to enable timely and effective cooperation in times of crisis that may affect the safety and efficiency of the FMIs. Any assessments should be shared; before finalizing an assessment the authorities should consult each other and take each other’s comments into account. - Principle 5 (haircuts) - Issue: Haircuts are determined in terms of appendix 4 of the WROMPSS; haircut ratios are determined once every two years. Details regarding testing the sufficiency of the haircut, stress-testing and pro-cyclicality are not available. - Recommended action: Increase frequency of review to take into account testing the sufficiency of haircuts, stress-testing and pro-cyclicality and changing market conditions. Make details regarding testing readily available. - Relevant party: BOK - Priority: Short-term, medium priority - Principle 7 (revocation/cancellation) - Issue: Participants can cancel/revoke a payment instruction in a queue only with consent of a pre-arranged funds beneficiary institution (article 10 (3) of ROMPSS and articles (20) and (42) of WROMPSS). - Recommended action: Amend ROMPSS and WROMPSS to emphasize and reflect this position. - Relevant party: BOK - Priority: Medium-term, medium priority - Principle 7 (flow concentration) - Issue: Concentration of settlement transactions towards the closing hours of BOK-Wire+. - Recommended action: Undertake an impact study on differential pricing on payment flows to facilitate deeper analysis and potentially avoid concentration. - Relevant party: BOK - Priority: Short-term, medium priority - Principle 8 (settlement finality) - Issue: Article 5 provisions implicitly state settlement finality. - Recommended action: Amend ROMPSS and WROMPSS to explicitly define the point at which settlement is deemed final and irrevocable in BOK-Wire+. - Relevant party: BOK - Priority: Medium-term, medium priority - Principles 3, 17 (business continuity planning) - Issue: BCP in ROMPSS/WROMPSS deals with 12 potential scenarios and considers non-availability of individual FMIs (KRX, KSD, KFTC) on a system-by-system basis. - Recommended action: Develop a more holistic approach that addresses disaster scenarios when operations of more than one FMI are disrupted. - Relevant party: BOK - Priority: Short-term, high priority - Principle 23 (disclosure) - Issue: BOK plans to use CPSS-IOSCO disclosure framework (December 2012). - Recommended action: Use the CPSS-IOSCO disclosure framework and make relevant information available in a language commonly used in financial markets in addition to domestic language. - Relevant party: BOK - Priority: Short-term, medium priority - Comment: All information provided in Korean may also be made available in English on the BOK website. ### Recommendations for the KRX-CCP - Principle 1 (legal/regulatory clarity and disclosure) - Issues: - Not all PFMI concepts covered in legal framework. - Not all laws and regulations disclosed in English. - Recommended actions: - Improve clarity by explicitly distinguishing trading and CCP activities in FSCMA; use internationally used concepts. - Improve disclosure of laws and regulations in English. - Relevant parties: KRX, FSC, FSS - Priority: Medium-term, medium priority - Principle 2 (objectives, governance, resources) - Issues: - Objectives for CCP not sufficiently explicit on safety, efficiency, and support for financial stability. - Insufficient independence of risk management committee. - Lack of resources allocated to risk management tasks. - Recommended actions: - Explicitly address CCP activities within KRX organization and publicly disclose objectives regarding safety, efficiency, and financial stability. - Risk management committee should be chaired by an individual independent from executive management. - Increase staff in KRX risk-management team. - Relevant parties: KRX, FSC, FSS - Priority: Short-term; independence and resources: high priority - Principle 3 (recovery) - Issue: No recovery plan. - Recommended action: Develop a recovery plan in line with PFMI and CPSS/IOSCO documentation; adapt legal framework to support plans. - Relevant parties: KRX, FSC - Priority: Short-term, high priority - Principle 4 (margin and credit risk) - Issues: - No margin collected for the securities market. - Joint compensation fund fixed size may not adapt to increased exposures. - Unclear whether affiliates concept is applied. - Back testing plans need implementation. - No independent validation of risk and margin models. - Recommended actions: - Reform credit risk management for securities by collecting risk-based collateral (margin) at least daily. - Consider removing fixed-size requirement of joint compensation fund; base contributions on exposures rather than trading volumes. - Ensure credit risk calculations include affiliates. - Continue reforms introducing back testing, sensitivity analysis, and “skin in the game”. - Ensure models are reviewed at least annually by qualified independent entity. - Relevant parties: KRX, FSC, FSS - Priority: Short-term or Medium-term, high priority - Principle 5 (collateral) - Issue: No concentration policy; weekly mark to market for bonds; no stress tests for haircuts. - Recommended action: Develop concentration limit policy, apply daily mark to market for bond collateral, and implement stress tests for haircuts. - Relevant party: KRX - Priority: Medium-term, high priority - Principle 6 (intraday margin and close-out) - Issues: - Intraday margin regulations approved but not implemented. - Standardized close-out period of 2 days may not acknowledge liquidity differences among products. - Recommended actions: - Continue implementing intraday margin arrangements. - Better substantiate the 2-day close-out period for individual products. - Relevant parties: KRX and stakeholders - Priority: Short-term (intraday margin high), Medium-term (close-out medium) - Principle 7 (liquidity stress testing) - Issue: No stress testing of liquidity needs for settlement FX currencies. - Recommended action: Implement stress testing exercises for foreign currencies. - Relevant party: KRX - Priority: Medium-term, medium priority - Principle 8–10, 13–19, 22–23 (operations, information, default management, portability, custodians, RTO, legal impediments, networks, disclosure) - Selected issues and recommended actions: - Enhance clarity of DM regulations to specify point after which member’s obligations may not be revoked. - Increase requirements and monitoring for settlement banks. - Improve DM rules to specify KRX’s CCP role in delivery. - Further improve securities and DM regulation to specify default management procedures in line with PFMI. - Extend portability regulations for securities market to align with derivatives market. - Link KRX recovery plan to size of liquid net assets and time to maintain critical operations; reassess sufficiency of settlement reserves. - Broaden custodian selection criteria and monitor compliance; reconsider 60 percent cap on assets held by one custodian. - Disclose investment policy in English. - Adapt regulatory framework to accommodate an RTO of 2 hours (current RTO of 3 hours is regulatory requirement). - Increase possibilities to identify risks from tiered participation where legal impediments exist. - Accommodate internationally accepted communication network standards. - Disclose all rules, regulations and guidelines in English. - Relevant parties: KRX, FSC, FSS, stakeholders, settlement banks (as specified per item) - Priorities: Mix of Short-term and Medium-term; many items high priority ### Recommendations for Authorities (BOK, FSC, FSS) - B (Lack of powers) - Issue: Lack of powers. - Recommended action: Increase powers of the BOK. - Responsible party: BOK - Priority: Short-term, high priority - B (Limited resources) - Issue: Limited resources at FSC. - Recommended action: Increase resources of the FSC. - Responsible party: FSC - Priority: Short-term, high priority - C (insufficient disclosure in English) - Issue: Insufficient disclosure on FMIs (in English). - Recommended action: Improve disclosure of information in English, in particular on websites of the FSC and FSS. - Relevant parties: BOK, FSC, FSS - Priority: Medium-term, medium priority - D (regulatory alignment to PFMI) - Issue: Current KRX regulations do not include PFMI requirements. - Recommended action: Adapt the regulations under the FSCMA to reflect PFMI requirements. - Relevant parties: FSC, FSS - Priority: Short-term, high priority - E (cooperation and coordination) - Issue: Cooperation and coordination among authorities considered ineffective. - Recommended action: Formalize cooperation and coordination among the BOK and FSC regarding regulation, supervision and oversight of FMIs. - Relevant parties: BOK, FSC - Priority: Short-term, high priority ### Detailed Assessment — BOK-Wire+ (Principle 1: Legal basis) - High-level finding: An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. - Material aspects and relevant jurisdictions - The BOK Act provides the legal basis for each material aspect of the FMI’s activities with a high degree of certainty. - Relevant statutory provisions (as presented): - Chapter II, Section 3 - article 28 (clauses 10, 11, 11-2, 11-3): BOK powers over operation and management of payment systems. - Chapter IV, Section 2—article 62: Reserves held by banking institutions with the BOK may be used for settlement of balances with the BOK or other banking institutions. - Chapter IV, Section 3—article 65: BOK empowered to provide emergency credit to banking institutions to overcome temporary shortages to complete funds settlement in event of breakdowns. - Chapter IV, Section 6—article 80: BOK can provide credit to for-profit enterprises. - Chapter IV, Section 7—article 81 (1): BOK can determine matters relating to payment and settlement systems it operates to promote safety and efficiency. - Article 81 (2): BOK can request other operators or supervisors to take measures for improving system operating rules. - Article 81 (3) and (4): Operators and participant institutions required to furnish materials related to payments and settlements to the BOK. - Article 81.2: BOK may provide temporary intraday liquidity to participants in payment systems it operates. - Pursuant to article 81 the BOK has established the ROMPSS and WROMPSS which stipulate details of BOK-Wire+’s operation. - ROMPSS provides detailed regulation on operations of payment systems, management of settlement risk, oversight, and supplementary provisions. - WROMPSS provides details on participation standards, transactions by account type, funds transfers, government and public bond settlement, CLS transactions, net settlement, DVP, intra-day liquidity support through intraday repos, settlement risk management (net debt caps, collateral, loss-sharing), oversight arrangements, and supplementary provisions (available in Korean on BOK website). - Settlement finality: - Ensured through article 120 of the Debtor Rehabilitation and Bankruptcy Act. Article 120 (1) states that effects of transfer instruction or payment, execution thereof, settlement, deductions, deposit funds, furnishing of security, disposition, appropriation, and settlement involving the participant shall accrue under conditions prescribed by the operator of the payment and settlement system and shall not be subject to cancellation, termination, revocation, or setting aside when rehabilitation procedures commence for any participant designated by the governor of the BOK after consulting with the FSC. - Bilateral netting: Recognized under Civil Act articles 492 to 499. - Electronic transactions legal basis: Electronic Financial Transaction Act (definitions in article 2 and clauses (3), (6), (11), (12)). - Securities immobilization and dematerialization: Legal basis in FSCMA articles 294 to 323; Registration of Bonds and Debentures Act; Government Bonds Act; Issuance and Distribution of Short-term Bonds Act. - Jurisdiction: BOK-Wire+ is only subject to the laws of Korea. - Legal basis for enforceability of netting and finality - Netting enforceability in hybrid BOK-Wire+ system: Civil Act (articles 492 to 499) read with ROMPSS (article 5) and WROMPSS [section 2 (articles 16 and 17), section 3 (1),(2),(3) and section 4 (1),(2),(3),(4)]. - Settlement finality: Article 5 of ROMPSS specifies settlement services; protection under article 120 of Debtor Rehabilitation and Bankruptcy Act applies to securities transactions as well. - Intra-day liquidity support - Intra-day liquidity support to participating institutions (banks, qualified financial investment companies and KRX) in BOK-Wire+ is made available by BOK under article 81-2 of the BOK Act. *Source: IMF staff report content in _cr14308 - 75. The BOK and FSC should define arrangements regarding the frequency of their information exchange and plan joint meetings, and related sections of the assessment.* ### Chapter 3 of the WROMPSS—article 58-2 to 58-9 provides details of the intra- ### chapter in the annual payment and settlement systems report. ### _cr14308 - chapter in the annual payment and settlement systems report ### Principle 3: Framework for the Comprehensive Management of Risks — overview - An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks. - BOK-Wire+ is the RTGS hybrid system owned and operated by the BOK. Payments from other systemically important FMIs, such as the KSD, CLS, and the retail payments are settled in BOK-Wire+. - As an RTGS system, the design involves no credit risk as such, while liquidity risk and operational risk are prevalent. - Provision of intra-day credit by BOK exposes BOK to credit risk; intra-day credit is provided as intra-day overdraft for banks and intra-day repo for qualified financial investment companies and KRX. Intraday credit to participants (banks and nonbanks) is fully collateralized; collateral value is subject to a haircut policy and collateral securities are classified as highly liquid securities bearing minimal credit and market risk. - Operational risk is addressed through standardized IT systems, detailed business continuity plans (BCP), and comprehensive operational risk-management plans including risk control self-assessment (RCSA) and key risk indicator (KRI) processes. ### Key consideration 1 — risk-management policies, procedures, and systems - Principal risk-management framework related to BOK-Wire+ is provided in the ROMPSS that the MPC has authority to enact and revise. - Framework documents: ROMPSS, WROMPSS, sub-regulations of the ROMPSS, and sub-regulations of BOK-Wire+ IT requirements. These address settlement risk, liquidity risk, credit risk, IT operations, operational risk, and business continuity. - Matters concerning important risk management related to BOK-Wire+ are decided on by or reported to the MPC in accordance with article 28 of the BOK Act. - The BOK submits the payment and settlement systems report on operation and management to the MPC on an annual basis. - Real-time monitoring: management and oversight units monitor payment flows in BOK-Wire+ in real time; monitoring includes participants’ settlement balances in current and settlement accounts and their use of intra-day overdraft; tool permits monitoring of payment flows, pending transactions in the queue, and use of intra-day liquidity facilities, enabling aggregation of exposures and troubleshooting capability. - Review cycles: - BCP is checked annually and revised as necessary. - Risk management frameworks are assessed every two years. - ROMPSS amendments are carried out by the MPC; WROMPSS can be amended with approval of the Governor; sub-regulations are formulated and amended by director generals with notification steps involving Deputy Governor approval. - Audit: internal audit by the independent audit department of the BOK; external audits by the National Assembly and the board of audit and inspection. ### Key consideration 2 — incentives for participants to manage and contain risks - Settlement Information System enables participants to actively monitor payment queues and liquidity balances and flows in real-time; participants can change priorities of payment instructions and cancel/revoke a queued payment instruction (article 10 (3) of the ROMPSS). - Note: the right to revoke a validated and accepted payment instruction has an important bearing on liquidity risk (principle 7) and settlement finality (principle 8) because it can introduce liquidity risk. - Participation standards: participants should adhere to BOK-Wire+ participation standards in article 4 appendix-5 of the WROMPSS. - Governance of IT and operations: director general of the IT department decides on IT issues (article 8 (2) of the WROMPSS); director general of the payment and settlement systems department decides on other operational issues (chapter 2 section 1 of WROMPSS). - Consultation and participant input: article 14 of WROMPSS establishes a consultative committee; article 3 of WROMPSS requires collection of participant opinions when changing or enacting policies. - Operational readiness criteria: minimum number of personnel fully dedicated to system-related duties and BOK-Wire+ transactions applied to prospective participants. - Fees: charged differentially depending on submission/settlement time to ease concentration near system closing time and enhance liquidity-saving measures. - Sanctions for risk-causing behavior: - Director general of the payment and settlement systems department may annually assess participants and impose sanctions per article 6 of WROMPSS; sanctions include requiring compliance with standards, advising withdrawal, or cancellation of participant access agreement. - Governor’s powers under article 43 of the ROMPSS: sanctions on a participant may include verbal warning, request for corrective actions, or partial or overall suspension of access to BOK-Wire+. For linked payment system operators, sanctions may include verbal warning and request for corrective actions. ### Key consideration 3 — interdependencies and material risks from other entities - Material risk identified: level of interdependency between systemically important payment systems (SIPS), participants, and BOK-Wire+ because final settlement of KRX (securities market), KSD (CSD), foreign exchange market, and retail payments takes place in BOK-Wire+. - Recognized risk paths: - Operational disruptions in BOK-Wire+ could cause liquidity and settlement risks for participants and other FMIs. - Delays or operational disruptions in other FMIs could cause pending payment instructions and queue management issues in BOK-Wire+, potentially extending operating hours. - Monitoring roles: - Payment and settlement systems department uses the real-time monitoring tool to observe settlement and payment flows and queued transactions. - IT department monitors overall IT functioning of BOK-Wire+. - Risk-management tools and legal provisions: - ROMPSS Chapters 2 and 3 and bilateral agreements with system operators provide measures for IT standards, communication protocols, message delivery, business procedures (article 12), participant duties (article 13), and business continuity measures and powers of the governor (article 14 clauses (1) and (2)). - Article 40 requires payment system operators to notify BOK of regulatory, procedural, or IT changes affecting safety and efficiency. - Article 41 enables BOK in an emergency to recommend temporary changes in procedures including temporary suspension of a participant. - WROMPSS articles 11 and 12 detail measures for ensuring business continuity and responding to system failure. - Management framework for deferred net settlements is provided in article 8 read with Chapter 3 Management of Settlement Risk in the ROMPSS. - Article 43 of ROMPSS allows sanctions on participants and operators causing risks. - Oversight assessments: - BOK carries out an assessment of systemically important payment systems once in 2 years. - Assessment dates mentioned: KRX (CCP) assessed in 2011; KSD (CSD) assessed in 2010. - BOK-Wire+ self-assessment conducted by BOK as part of the FSAP exercise. ### Key consideration 4 — recovery and orderly wind-down - BCP scope: - BOK-Wire+ BCP, in accordance with ROMPSS, WROMPSS, and sub-regulations, deals with 12 potential scenarios. - BCP addresses physical emergencies (technical malfunctions, natural and artificial disasters) and human disasters (disease epidemics). - Recovery plans include precautionary measures and emergency responses per detailed scenarios. - Recommendation in report: - It would be appropriate for the BCP scenarios to also take into account a more adverse disaster scenario when operations of more than one FMI are disrupted, rather than considering non-availability of individual systems only. - Recovery/wind-down posture: - BOK-Wire+ is central bank-owned and operated and therefore has the ability to provide critical operations as a going concern; its recovery plan is limited to recovery from extreme circumstances impacting operational reliability. - Emergency procedures: in an emergency, BOK decides the type of emergency, sets up an emergency response committee if necessary, and takes necessary actions. ### Key conclusions and assessment for Principle 3 - Decision-making and legal framework: - Matters concerning important risk management related to BOK-Wire+ are decided on by or reported to the MPC per article 28 of the BOK Act. - Principal framework provided in ROMPSS; detailed frameworks in ROMPSS, WROMPSS, and sub-regulations, addressing settlement risk, liquidity risk, credit risk, IT operations, operational risk, and business continuity. - Annual submission of payment and settlement systems report to MPC. - Material interdependency risk: - Final settlement of various SIPS occurs in BOK-Wire+; interdependency between SIPS, participants, and BOK-Wire+ is the material risk identified. - Operational disruptions in BOK-Wire+ could build liquidity and settlement risks; disruptions in other FMIs could cause pending instructions and queue management issues and extend operating hours. - Business continuity and emergency response: - In an emergency, an emergency response committee is set up and necessary actions taken; BCP is reviewed annually and revised as necessary. - Assessment result: Observed. - Recommendation (explicit): - The BCP currently deals with 12 potential scenarios and considers non-availability of the systems of operators of FMIs like the KRX, KSD, and the KFTC on a system-by-system basis. It is recommended to develop a more adverse disaster scenario when the operations of more than one FMI are disrupted rather than taking into account non-availability of individual systems in the BCP. --- *Source: chapter in the annual payment and settlement systems report (ROMPSS/WROMPSS content on BOK-Wire+ risk management).* ### 5.15 p.m. ### 5.15 p.m. ### Eligible participants and collateral for intraday repo transactions - Only qualified financial investment companies and the KRX are selected eligible to receive intraday liquidity through intraday repo transactions. - Bonds eligible for the transactions are strictly limited to: - Korea treasury bonds (KTBs), - monetary stabilization bonds (MSBs) issued by the BOK, - other government-guaranteed bonds which have low credit, liquidity, and market risks. - The BOK establishes stable and conservative haircuts taking into consideration sharp price fluctuations. - Limits of intra-day liquidity provision to individual participants are set proportional to their equity capital. ### Legal and operational details (Chapter 3, article 58 of the WROMPSS) - Article 58-3: A cap on the support to cover temporary shortage of funds settlement shall not exceed 25 percent of the equity capital of the institution, with the exception for the KRX, which shall be provided the amount requested. - Article 58-4: Securities subject to intraday repo transactions including their market transaction prices of the previous day and the haircuts prescribed by the BOK. - Article 58-5: Methodology of the haircuts applied as specified in appendix 4 of the WROMPSS. - Article 58-6: Method of availing intra-day repo support either through automatic route or through support by transaction basis. - Article 58-7: Repayment of funds drawn to meet temporary shortages in settlement balances. - Article 58-8: Priority processing of transactions to support temporary shortages of settlement balances and repurchases. - Article 58-9: Recording and management of intra-day repo transactions. ### Intra-day overdrafts: eligibility, terms, and monitoring - Intra-day overdrafts to banks are provided as part of the broader monetary policy operations under the lending and deposit facilities of the BOK (http://www.bok.or.kr/broadcast.action?menuNaviId=1906). - Introduced in September 2000 by the BOK to extend financial support to banks experiencing temporary shortages of settlement funds in the course of a day. - Financial institutions that are subject to reserve requirements and participate in BOK-Wire+ are eligible for intra-day overdrafts. - If a bank fails to redeem its borrowings by the close of the business day, non-redeemed intra-day overdraft amount is converted into a liquidity adjustment loan. - Liquidity adjustment loans are in principle provided on an interest-free basis. - Interest is applied on loans exceeding 25 percent of a financial institution's equity capital—at a rate equivalent to the spread between yields on three-year treasury bonds and the uncollateralized overnight call rate during the last month of the immediately preceding quarter. - The BOK monitors the amounts of intraday overdrafts of individual BOK-Wire+ participants in real time. - BOK-Wire+ is designed so that no further intraday overdrafts are provided to a participant when the amount of that participant's intra-day overdrafts reaches the value of its pledged collateral. - The BOK receives bonds as collateral which have low credit, liquidity and market risks such as KTBs and MSBs. *Republic of Korea — Excerpt from source PDF _cr14308 - 5.15 p.m.* ### Chapter 4 of the Regulation on BOK’s Loans issued by the MPC deals ### Chapter 4 of the Regulation on BOK’s Loans issued by the MPC deals ### Intra-day overdraft facility (articles and arrangement) - Relevant articles: article 14 (Qualified Financial Institution for Intraday O/D); article 15 (Time Limit of Redemption of Intra O/D); article 16 (Handling of Unredeemed Loan of Intra O/D); article 17 (Collection of Interest for using Intraday O/D). - Chapter 3 of the Working Regulation on the BOK's Deposits and Loans provides details of intra-day overdraft arrangements. - If a participant fails to redeem its intraday liquidity provided by the BOK, the BOK may dispose of the collateral presented by the defaulting participant. - There is no process to replenish financial resources because the BOK covers credit losses through collateral with low credit, liquidity and market risks, applying conservative haircuts. - The intraday overdraft facility provided to banks is interest free; interest is charged to banks when the intra-day overdraft availed by them exceeds 25 percent of the bank’s equity capital. - For non-bank participants, the intra-day repo limit is pegged at 25 percent of the equity capital of the entity concerned. ### Collateral (Principle 5) — eligibility, valuation, haircuts, management - Eligible collateral: KTBs issued by the government and MSB issued by the BOK. No cross-border collateral accepted. - Wrong-way risk: not applicable given KTBs and MSBs are accepted. - Valuation: BOK marks collateral to the market on a daily basis at the start of the day; no instances of discretion exercised. - Haircuts: determined once every six months in terms of Article 1-3 (Appendix) of Working Regulation on BOK's Loans and Article 58-5 (appendix 4) of the WROMPSS. - Haircut table (preserve formatting and figures exactly as presented): - Maturity 1) Under 1 Year — Ratio 2) (%)98 (98) — Variation of government bond price 3) (%) 1.60 - Maturity 1) Under 3 Years — Ratio 2) (%)97 (96) — Variation of government bond price 3) (%) 1.71 - Maturity 1) Under 5 Years — Ratio 2) (%)96 (95) — Variation of government bond price 3) (%) 1.68 - Maturity 1) Uver 5 Years — Ratio 2) (%)95 (94) — Variation of government bond price 3) (%) 2.02 - Note: (1) Maturity based on mark-to-market day. (2) Coupon bond standard; figures in ( ) for bonds such as discount bonds for which principal is repaid at one time. (3) Standard deviation of the bond index/average bond price of the index x 100 from September 2007 to September 2008. - Collateral management system: Safe+ system of the KSD linked to BOK-Wire+, enabling intraday liquidity extension and disposal of collateral. - Key conclusions for Principle 5: - Securities eligible as collateral are limited to bonds having low credit, liquidity and market risks. - Haircuts are applied and determined every six months; details on stress testing of haircuts, analysis on sufficiency of collateral and pro-cyclicality not available. - Details of any independent validation on an annual basis are not available. - Assessment: Broadly Observed. - Recommendation: Increase frequency of review of the haircut methodology and include independent validation on an annual basis. ### Credit risk and default procedures (Principle 4 and 13) - BOK-Wire+ processes fund transfers based on an RTGS mechanism; no credit risk in settlement mechanism itself. - BOK’s credit exposure from providing intraday liquidity is fully covered by collateral with low credit, liquidity and market risks such as KTBs, MBSs and other government-guaranteed bonds, with stable and conservative haircuts. - Allocation of credit losses: BOK may dispose of collateral of defaulting participant. - Use of financial resources in a default: BOK collects funds by selling collateral in financial markets; if not practical, BOK can purchase the collateral securities itself. - Default rules and procedures are published on the BOK webpage and agreements; BOK holds annual meetings with participants to discuss liquidity facility procedures and reflects participants’ opinions when rules are revised. - Key conclusions for Principle 4 and 13: - BOK’s exposure to credit risk is limited due to fully collateralized intra-day credit. - Collateral management system is linked to KSD and operates efficiently. - Assessment of Principle 4: Observed. - Assessment of Principle 13: Observed. ### Margin (Principle 6) - Most Key Considerations and associated requirements for CCP margin systems are marked N/A. - Key conclusions for Principle 6: N/A. - Assessment of Principle 6: N/A. ### Liquidity risk (Principle 7) - Liquidity risk arises when participants cannot settle due to lack of balances in their accounts with BOK. - Mitigants and arrangements: - BOK provides intra-day liquidity facilities to banks and non-bank participants on a fully collateralized basis. - Hybrid settlement mechanism with bilateral and multilateral offsetting is triggered every 30 minutes for queued payments. - Differential transaction processing fees incentivize earlier submission; fees higher toward end-of-day. - Real-time monitoring tool in BOK-Wire+ allows BOK to monitor settlement flows and queued transactions; Settlement Information System enables participants to monitor and change priorities, or cancel/revoke queued instructions with consent of pre-arranged funds beneficiary institution (article 10 (3) of ROMPSS and articles (20) and (42) of WROMPSS). - If participants fail to repay intraday overdraft, it is converted to an overnight facility (liquidity adjustment loan) with a penalty rate of interest. - BOK-Wire+ is an RTGS system; BOK is the issuer of currency and lender of last resort in KRW and can meet KRW requirements of all participants at all points in time. - Key conclusions for Principle 7: - Liquidity risk is minimized due to intraday liquidity provision and hybrid settlement. - Real-time monitoring, settlement information tools, and differential pricing support liquidity management. - Concentration of settlement activity around 4.00 pm (KRX settlement instructions) and settlement of call loans and repo transactions concentrated around 4.00 pm due to settlement cycle (T+0) and market practices, creating settlement concentration toward closing hours. - Assessment: Observed. - Recommendations/comments: - Amend article 10 (3) of ROMPSS and article 42 of WROMPSS to clarify cancellation/revocation positions. - Undertake an impact study on differential pricing effects on payment flows. ### Settlement finality (Principle 8) - All payments through BOK-Wire+ are settled in real-time during operating hours; funds transfer orders in queues due to insufficient balances are cancelled at end of operating day. - ROMPSS and WROMPSS do not explicitly define the point at which settlement is deemed final; article 5 of ROMPSS provides implicit statements on finality. - Settlement is protected under article 120 of the Debtor Rehabilitation and the Bankruptcy Act and cannot be cancelled or revoked; provisions also applicable to securities transactions. - Participants can cancel/revoke a queued payment instruction only with consent of a pre-arranged funds beneficiary institution. - Key conclusions for Principle 8: - Settlement is real-time and final/irrevocable once settled. - Legal protection via article 120 ensures finality. - Assessment: Observed. - Recommendation: Amend ROMPSS and WROMPSS to explicitly define point of settlement finality and reflect cancellation/revocation provisions. ### Money settlements (Principle 9) - Cash settlement in BOK-Wire+ occurs in central bank money only, in KRW. - Assessment for Principle 9: Observed. ### Exchange-of-value settlement systems (Principle 12) - DVP and PVP mechanisms used to eliminate principal risk: - Securities settlement: KSD operates CSD and supports DVP1 and DVP3 schemes; stocks T+2, government bonds T+1, general bonds T. - For KRX markets, members must transfer funds or securities to KSD by no later than 16:00 on settlement date. - Foreign exchange settlement: KRW is CLS-eligible and settled through CLS via PVP; CLS Bank uses its current account with BOK; CLS Bank granted direct access to BOK-Wire+ via a “CLS Link System”. - Key conclusions for Principle 12: DVP and PVP in central bank money eliminate principal risk. - Assessment: Observed. ### Custody, investment, and CSD oversight (Principles 11 and 16) - KSD is the sole CSD in Korea established under the FSCMA; provides centralized depository and securities settlement; supervised by FSC; BOK oversees settlement systems operated by KSD. - BOK assesses the KSD every two years in accordance with international standards and may request revisions. - BOK can inquire about collateral details in real time and dispose of collateral via the linked collateral management system. - Key conclusions for Principle 16: - KSD is assessed every two years by BOK for oversight activity. - Assessment: Observed. - Recommendation: Consider assessing the FMI at more frequent intervals given criticality. ### Operational risk and business continuity (Principle 17) - Operational risk framework documented in ROMPSS and WROMPSS; Articles 11–14 and 40–43 provide duties, business continuity measures, emergency powers, and sanctions. - Controls and standards: - RCSA and KRI processes established; Information Committee (deputy governor + department heads) for IT and operational decision-making. - Change and quality management systems, ISO20000 post certification review annually, IT vulnerabilities diagnostics annually. - Operational reliability and capacity: - Quantitative and qualitative objectives defined in IT Service Management Guidelines. - System utilization monitored in real-time; Capacity Management Guidelines allow queuing of less important processes when peak approaches capacity. - Security and BCP: - Physical security per Regulation on Safety Management; data loss prevention, encryption per international standards. - RTO set at 2 hours. - BOK-Wire+ business hours: 9 a.m. to 5.30 p.m. - Backup sites: Gangnam branch as first backup; secondary alternative site is a hot-site; secondary site resources checked periodically. - BCP testing: on-site training once a year, simulated training twice a year, secondary site resource inspection every other month. - Inter-FMI coordination: - FMI Operation Council consults with directors general of other FMIs. - Key conclusions for Principle 17: - Comprehensive operational management guidelines established; RTO of 2 hours; BCP covers 12 potential scenarios. - Assessment: Observed. - Recommendation: Develop a more holistic approach considering disaster scenarios when other FMIs’ operations are disrupted. ### Access and participation (Principle 18) - Article 6 of ROMPSS: institutions eligible to become members of BOK-Wire+ shall be those institutions which maintain a current account with BOK and comply with standards set by the Governor. *Source: _cr14308 - Chapter 4 of the Regulation on BOK’s Loans issued by the MPC deals* ### Appendix 5 of the WROMPSS provides the detailed BOK-Wire+ ### _cr14308 - Appendix 5 of the WROMPSS provides the detailed BOK-Wire+ ### Participation standards and entry criteria - Capital and solvency thresholds for participation: - For banks, comprehensive financial company and securities finance company: capital adequacy ratio against risk-weighted assets should be over 8 percent. - For financial investment company: net capital ratio should be over 150 percent. - For insurance companies: RBC ratio should be over 100 percent. - For other institutions not covered by these standards: the director general responsible for the payment and settlement system can specify the requirements. - Activity and staffing requirements: - The monthly average usage should be above 50 transactions for one year after participation. - A total of 4 personnel should be exclusively devoted to BOK-Wire+ operations at the member’s end. - Disclosure: - The criteria for participation and suspension and cessation of membership are stipulated in the ROMPSS and WROMPSS and are publicly disclosed on the BOK webpage. ### Justification, least-restrictive access, and risk-based tailoring - Rationale: - Participation requirements take into account the needs of the financial markets in Korea while ensuring safety and efficiency of BOK-Wire+ in view of the financial stability mandate of the BOK. - Given that all systemically important payment systems settle in central bank money through BOK-Wire+, the participant access requirements are justified. - Risk-based approach: - Participant requirements are risk based. - For payment system operators seeking final settlement via BOK-Wire+, the BOK evaluates safety and efficiency of the payment system before deciding on its application as laid down in article 7 of the ROMPSS. - Least-restrictive access: - Participants satisfying the participation criteria may access BOK-Wire+ without any restrictions. ### Monitoring compliance, suspension and orderly exit - Ongoing monitoring: - The director general of the payment and settlement systems department conducts an annual assessment of participants in terms of article 6 of the WROMPSS. - Based on the assessment review, participants may be asked to devise plans for complying with the participant requirements or could be advised to withdraw from BOK-Wire+. - Suspension and exit: - Procedures for suspension and cessation of membership are stipulated in the ROMPSS and WROMPSS and publicly disclosed on the BOK webpage. ### Assessment and conclusions for Principle 18 - Key conclusion: - The BOK-Wire+ has fair and open access criteria for participation, comprehensively considering each participant’s risk management capability, the stable and efficient operation of BOK-Wire+, and the possibility of systemic risk. - Assessment of Principle 18: Observed - Recommendations and comments: none listed. ### Tiered participation arrangements (Principle 19) - Legal/operational basis: - Article 5 (6) of the WROMPSS permits indirect participation, enabling institutions that have not joined BOK-Wire+ to use it through other participants. - Indirect participation specifics: - Indirect participants are usually institutions that cash settle stock market transactions in the KOSPI and KOSDAQ markets. - Indirect participants should submit applications for participation (or withdrawal) to the BOK. - Currently there are 12 indirect participants in the BOK-Wire+. - Risk assessment and monitoring: - Risks from indirect participants are minimal because transactions of indirect participants are limited to funds available in the account of the indirect participant. - The BOK identifies the individual BOK-Wire+ transactions that indirect participants put through direct participants and can gauge amounts being settled. - Direct participants can put through transactions on behalf of indirect participants limited to the funds available in the account of the indirect participant. - The value of transactions put through by indirect participants in the total settlement value of the BOK-Wire+ is small. - The BOK identifies and monitors settlement values of indirect participants in real time. - Key conclusion: - The BOK is able to identify and monitor transactions of indirect participants in real time; risks are small because volumes from indirect participants are low and limited to available funds. - Assessment of Principle 19: Observed - Recommendation and comment: - It is not clear how the BOK monitors that direct participants are putting through transactions on behalf of indirect participants which are limited to availability of funds in the indirect participants’ account with the direct participant. The BOK may consider seeking a periodical statement to this effect from the direct participants. ### Links with other FMIs (Principle 20) - All key considerations listed (Key considerations 1–9) marked N/A. - Key conclusions for Principle 20: N/A - Assessment of Principle 20: N/A - Recommendations and comments: N/A ### Efficiency and effectiveness (Principle 21) - System design and participant engagement: - BOK-Wire+ was developed to address liquidity needs of participants. - As non-bank participants became members, an intraday repo system was introduced to address intraday liquidity needs. - Consultative committee meetings with participants are held periodicaly (once every 6 months) to discuss major policy issues, design changes, implementation of standards; feedback is used for improvements. - Hours and operational practices: - Hours of operation: 9 a.m. to 5.30 p.m. from Monday to Friday; hours can be extended by BOK. - BOK-Wire+ closing times were extended seven times during the year 2011 due to IT failures at participants’ systems. - Payment instruction types: “Urgent” and “Normal”. - Urgent instructions: settled immediately on a gross basis if sufficient balance; if insufficient, held in a queue until sufficient balances are available or offsetting can be initiated. - Normal instructions: simultaneous bilateral settlement when counterparty’s instruction is received or settled through a multilateral offsetting mechanism every 30 minutes as a liquidity saving measure. - Goals, objectives, and cost recovery: - Goals: provide real-time intraday settlement in central bank money in a safe and efficient manner for all systemically important payment systems and markets; enunciated in the ROMPSS, WROPSS and sub-regulations. - Operations submitted annually to the MPC in terms of article 44 of the ROMPSS. - BOK-Wire+ evaluated on a regular basis according to measurable objectives, e.g., referencing IT Service Management Guidelines. - BOK-Wire+ recovers its costs from participants and payment system operators in terms of article 9 of the ROMPSS and has differential pricing for payment instructions to encourage early submission. - Review mechanisms: - Observance of settlement procedures is examined in regular reports (report on BOK-Wire+ operations and monitoring report). - Efficiency and effectiveness reviewed daily during monitoring activities. - An evaluation of BOK-Wire+ as to overall safety and efficiency is carried out every two years, in accordance with international standards. - Key conclusions for Principle 21: - Operational objectives in relevant regulations have been fulfilled; BOK-Wire+ is operated efficiently and its system design reflects participant and market needs. - Assessment of Principle 21: Observed - Recommendations and comments: none listed. ### Communication procedures and standards (Principle 22) - Communication procedures: - BOK-Wire+ uses TCP/IP, the Internet standard, as its communication procedure with participants. - Communication standards: - Uses international messaging service providers such as SWIFT for processing transactions linked with CLS bank; SWIFT messages are converted using a converter for processing and settlement in BOK-Wire+. - Proprietary message formats are used in BOK-Wire+; a future review could migrate to ISO 20022 message standards. - Key conclusions for Principle 22: - BOK-Wire+ uses the TCP/IP protocol for major communication processes and international messaging providers such as SWIFT for transactions linked with the CLS Bank. - Assessment of Principle 22: Observed - Recommendation and comment: - A review to migrate to ISO 20022 message standards may be initiated and completed. ### Disclosure of rules, procedures, and market data (Principle 23) - Rules, procedures and disclosure: - ROMPSS and sub-regulations stipulate structure and means of operation, tasks and business procedures of BOK-Wire+. - Emergency procedures (e.g., extensions of operating hours) and BCP for participants are released to participants. - Prior to amendments to regulations and sub-regulations, BOK announces proposed amendments to participants (official document or consultation committee) and discloses to the public via the BOK webpage. - Relevant information should be made available in a language commonly used in financial markets in addition to the domestic language. - Major changes described in the payment and settlement systems report, published annually. - Participant information and training: - Participants’ rights, obligations and risk management procedures are stipulated in ROMPSS and sub-regulations; system structure explained in manuals and guidebooks provided to participants. - BOK provides relevant regulations, manuals and guidebooks, advice through regular interview visits, and information via consultation committee meetings and explanatory meetings for important issues. - Fees and pricing transparency: - BOK acquires extensive opinions before setting BOK-Wire+ fees and discusses proposed fees with the consultation committee of participants. - Before setting fees, BOK conducts surveys of participants and explanatory meetings; fees set in consideration of survey and meeting results. - Disclosure framework and statistics: - Regulations and business procedures are disclosed through the BOK webpage. - Assessment of BOK-Wire+ included in the annual payment and settlement systems report. - BOK plans to use the disclosure framework published by the CPSS-IOSCO in December 2012. - Statistics on BOK-Wire+, including monthly transaction values and volumes, are disclosed through the BOK webpage; the annual report includes analyses of related statistics. - Key conclusions for Principle 23: - ROMPSS and sub-regulations are disclosed through the BOK webpage; BOK provides manuals and guidebooks to facilitate participant understanding. - BOK plans to use the CPSS-IOSCO December 2012 disclosure framework. - Assessment of Principle 23: Partly Observed - Recommendations and comments: - To facilitate understanding of stakeholders including participants, BOK plans to use the CPSS-IOSCO December 2012 disclosure framework. - BOK should make relevant information and data it discloses available in a language commonly used in financial markets in addition to the domestic language. ### Disclosure by Trade Repositories (Principle 24) - Key considerations 1–3: N/A - Key conclusions for Principle 24: N/A - Assessment of Principle 24: N/A - Recommendations and comments: N/A ### Detailed assessment start for KRX-CCP — Principle 1: Legal basis - Material aspects for the KRX-CCP: - Legal basis for the CCP; - Settlement finality and arrangements for DVP; - Netting; - Novation; - Rights and interests of participants and clients in financial instruments; - Rights and interests of the KRX to use and dispose of collateral; - Default procedures. - Relevant jurisdictions: - As the CCP is active in Korea the Korean jurisdiction applies. The CCP has no links with FMIs in other jurisdictions. - With regard to non-local clearing members: a third country financial institution intending to apply for KRX membership must establish a local entity or a branch to get a business license from FSC as a financial investment trader or financial investment broker; thereafter the third country entity can apply for KRX membership and should comply with membership requirements. - Currently there are 12 non-local clearing members in the securities market, 10 in the bond market and 9 in the derivatives market. - Non-local clearing members represent jurisdictions from France, Germany, Japan, Malaysia, the Netherlands, Singapore, U.K. and U.S. - With regard to collateral the U.S. jurisdiction is relevant as KRX accepts government securities from the US to cover collateral requirements. - The legal basis for each material aspect: (document continues beyond provided excerpt) *Source: Appendix 5 of the WROMPSS (BOK-Wire+ detailed participation standards) as provided in the supplied content.* ### Chapter VII of the FSCMA describes the organization and ### _cr14308 - Chapter VII of the FSCMA describes the organization and ### Summary - Chapter VII of the FSCMA describes the organization and responsibilities of the KRX, in particular the articles 377, 378, and ### Key point - The chapter focuses on the organization and responsibilities of the KRX, with specific reference to articles "377", "378", and (text ends). *https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14308.pdf* ### 393. The FSCMA specifies the business scope of a CCP including ### _cr14308 - 393. The FSCMA specifies the business scope of a CCP including ### Legal basis, enforceability, and scope of CCP activities (Principle 1) - The FSCMA specifies the business scope of a CCP including transaction confirmation, debt acquisition, confirmation of settlement, settlement guarantees and default procedures in the securities market and the derivatives markets (article references throughout text). - Settlement finality and DVP arrangements are specified in market regulations. - The Debt Rehabilitation and Bankruptcy Act (Act No.8863, 29. February 2008; articles 120 and 336) specifies that contracts for which the CCP becomes the counterparty cannot be removed, terminated, cancelled or disclaimed due to the bankruptcy procedures of one of the KRX members. - Market regulations specify priority of claims of the KRX and its participants over other creditors with respect to payment of fidelity guarantee money, member margin and joint fund contributions. - Market regulations specify DVP procedures for different types of clearing members. - Netting protection: - Debt Rehabilitation and Bankruptcy Act (articles 120 and 336) protects netting by preventing removal, termination, cancellation or disclaimer of transaction contracts for which the CCP becomes the counterparty in the event of bankruptcy of a KRX member. - Market regulations protect netting arrangements including CNS (continuous net settlement). Settlement of securities not delivered on the specified day are netted together with settlement positions of the next day. - Novation and moment of liability: - Specified in KOSPI regulation articles 72 and 73; KOSDAQ articles 28 and 29; and DM business regulation articles 93 and 94. - Customers’ asset protection: - FSCMA articles 74 and 75 prescribe separation between participants and their customers’ cash and securities deposits. - Rights to use and dispose of collateral: - Article 397 of the FSCMA grants the KRX the right to appropriate collateral deposited by a participant as margin or contribution to the joint compensation fund or else to cover losses following a default of that participant. - Default procedures: - FSCMA article 377 specifies the KRX responsibility for follow up measures on settlement failure. - Regulations specify when a clearing member should be suspended and actions the CCP may undertake, including buy-in procedures to ensure settlement between clearing members. - Rulemaking and amendment process: - CCP activities of the KRX are stipulated in KOSPI, KOSDAQ and DM market business regulations based on FSCMA, in particular article 393. - Market business regulations have additional enforcement rules. - FSCMA article 412 requires the KRX to obtain prior approval of the FSC for amending existing market regulations. - A legal review team of three in-house lawyers and an independent auditor reviews adequacy of legal provisions. - Enforceability and cross-border considerations: - High certainty that KRX regulations, procedures and contracts are enforceable in Korean jurisdiction. - Non-local financial institutions must establish a local entity or branch and obtain a business license from the FSC as a financial investment trader or broker to apply for KRX membership. - U.S. securities deposited as collateral are held on an account of the KSD at a US custodian; collateral is pledged to the KRX and legal experts deem the probability of loss very low. - No precedent that actions taken by the KRX in accordance with its regulations have been voided, reversed or subject to stays in Korean courts. - Key conclusion for Principle 1: - Legal basis for KRX-CCP is generally sound and enforceable; Debt Rehabilitation and Bankruptcy Act provides statutory foundation for netting, set-off and closing out of positions. - Room for improvement: clarity of regulatory framework, clearer separation between trading and CCP provisions, greater alignment with PFMI concepts, and explicit provisions to support recovery activities (KRX has not developed a recovery plan yet). - Recommendations (Principle 1): - Explicitly distinguish between trading and CCP activities in the FSCMA. - KRX regulations should make better use of internationally used concepts, in particular the concepts used in the PFMI. - Improve disclosure of laws and regulations to clearing members and public disclosure in English. - Develop a recovery plan and establish enforceable rules, procedures, and contracts for recovery and orderly wind-down; address risks from foreign participants in such planning. ### Governance (Principle 2) - Legal and public-objective gaps: - FSCMA stipulates KRX establishment objectives (article 373) to fix and stabilize fair prices and facilitate stability and efficiency, but objectives do not explicitly contain safety and efficiency objectives for clearing and settlement or specify how public interests will be taken into account for the CCP. - Ownership structure (exact figures preserved): - Treasury stock 4.62 percent; - Members (36 firms) 88.17 percent; and - Market-related organizations (3 firms) 7.21 percent. - Governance framework: - KRX governed by FSCMA, act of public institutions and the commercial act; articles of incorporation and KRX regulations further specify governance. - FSCMA prescribes board of directors, executives, qualifications, board committees and majority non-executive board requirement. - Share ownership limited to 5 percent of total voting shares with exceptions; sale of holdings requires prior board approval per article 58 of articles of incorporation. - KRX designated as a public institution after demutualization (stock company conversion in 2005); governance (budget, personnel, business plan) is under government control, but April 2013 FSCMA revisions allowing multiple trading venues may challenge monopoly and require review of public institution status. - Board composition and responsibilities: - Board composed of chairman, chairman of the market oversight commission, 5 senior executive directors and 8 non-executive directors. - Chairman is also chairman and CEO and is appointed by the President of the Republic of Korea upon recommendation of the FSC. - Senior executive directors include chairman of the audit committee, president of management strategy division, president of KOSPI market division, president of KOSDAQ division, and president of derivatives market division. - Non-executive directors comprise five independent directors representing public interests and three directors representing investment dealing or brokerage firms; non-executive directors are appointed by the FSC. - Board responsibilities include establishment of business objectives, budget, operational plans; establishment/amendment/abolition of regulations; acquisition/disposal of principal assets; leasing major assets and borrowing long-term cash loans; investments and donations; establishment of branches; use of reserves; matters to be referred to the general shareholders’ meeting; matters with material impact on KRX business; and matters stipulated in laws and KRX regulations. - Board meetings convened at least once every three months. - Board committees (listed roles): - Market committee (KOSPI Market Committee; KOSDAQ Market Committee; Derivatives Market Committee) — authority to formulate/amend market business regulations, listing and disclosure regulations, prepare market business plans, approve reserve fund usage, deliberate market operations and matters delegated by the board. - Remuneration committee — determines compensation of chairman, chairman of market oversight division and executive directors within officers’ compensation limit and guidelines for retirement benefits. - Audit committee — audits operations and accounts of the KRX. - Risk management committee — establishes policies for risk management, sets and manages risk limits, addresses crisis identification and management, and oversees development and operation of risk management systems; decisions escalated to the board for endorsement. - Performance review and non-executive oversight: - Directors report on duties and performance to the board at least once every 3 months (regulation article 3). - Non-executive directors’ meeting convened every 2 months. - Requirements for independent directors: - Independent director representing public interests must not be engaged in investment dealing or brokerage or related business and must have good understanding of securities and derivatives markets. - Must also meet one of: over ten years’ relevant experience representing public interest; doctorate or higher with over ten years’ relevant work experience; or certified lawyer or accountant with over ten years’ experience in government, law office or accounting company. - Roles and responsibilities of management: - Management = executive board members: KRX chairman, chairman of market oversight commission, and five senior executive directors. - Duties specified in article 23 of articles of incorporation; chairman represents KRX and is responsible for overall management. - Executives must meet rigorous qualification criteria: senior civil service background or 15 years’ experience in financial institutions etc. (FSCMA article 356 of the enforcement decree). - Risk management governance and resourcing concerns: - Risk management department reports to strategy and planning department under management strategy division; team consists of five experts. - Risk management committee is chaired by a senior executive director (president of management strategy division) and includes 2 non-executive directors (financial expert and legal expert). - Audit committee composition: one executive director and two non-executive directors; at least one member specialist in accounting or finance; chairman of audit committee is an independent director representing public interests. Internal audit office supervised by audit committee. - Stakeholder engagement and disclosure: - KRX operates clearing and settlement committee (6 members from member firms and universities) and functional conference on clearing and settlement (11 members from member firms) to collect market participant opinions. - Article 412 requires prior FSC approval for amending market regulations. - KRX invites clearing members to explanatory briefings for major rule changes and plans to adopt standard prior notice procedures. - Major decisions disclosed on KRX website, via press releases and publications in Pusan Ilbo and Seoul Shinmun. - Key conclusions for Principle 2: - Governance arrangements are transparent; roles and responsibilities of board and management clearly described and publicly available. - Non-executive directors appointed to represent public interests. - Risk management committee and department exist and report to the board. - Gaps and concerns: risk management committee chaired by an executive director (not fully independent), small number of risk management and clearing & settlement staff relative to responsibilities, objectives do not prioritize CCP safety/efficiency or explicitly support financial stability. - Assessment of Principle 2: Broadly Observed - Recommendations (Principle 2): - Explicitly address CCP activities within KRX organization and publicly state objectives for KRX-CCP including safety, efficiency and support for financial stability. - Risk management committee chair should be independent of executive management, preferably a non-executive director. - Publish risk management regulation on KRX website. - Increase staff responsible for risk management to ensure proactive companywide and CCP risk oversight and familiarity with PFMI; ensure sufficient independence and authority to ensure compliance with PFMI. ### Framework for comprehensive risk management and recovery (Principle 3) - Company-wide risk management: - KRX identifies and manages four main risks: credit, market, liquidity and operational risks. - Risk management committee determines overall company-wide risk limit and limits per type of risk annually; risk management department aggregates inputs from departments via risk self assessments. - Key performance indicators (KPIs) used to evaluate departments’ performance. - Risk management regulation and tools: - Risk management regulation introduced in April 2009 specifying risks, responsibilities and procedures. - Risk management department prepares annual risk management plan and reports to risk management committee; committee evaluates feasibility quarterly or more frequently. - Internal audit conducts annual surveillance on adequacy. - Systems implemented: - Settlement Risk Management System (operational since December 2010) — measures, monitors and manages credit risk and liquidity risk from defaults; calculates risk exposures and evaluates settlement risk daily; connected to KRX clearing and settlement system and data vendors. - Operational Risk Management System (January 2013) — measures, monitors and manages operational risk (internal procedures, personnel, systems, external events, business risk, IT risk, legal risk, reputational risk); extracts KRIs and KRI limits automatically; collects and evaluates RCSA and KRI values quarterly. - Incentives and participant risk management: - Real-time information to trading and clearing members on exposures. - Incentives for early settlement, including penalties on delayed settlements. - Workshops, seminars and task force for risk managers among trading and clearing members. - CCP collects member margins proportionate to daily risk exposure (derivatives) and requires joint compensation fund contributions proportionate to member margin ratio of previous year. - Interdependencies and third-party risks: - KRX exposures to other entities: - KSD (only securities depository) — custody and operational risk exposure. - BOK — exposure to operational risk for cash settlement in securities market. - Commercial banks — credit, liquidity and operational risk exposure for cash settlement in derivatives market. - KRX poses credit, liquidity and operational risk to participants as CCP counterparty; vertical relationship with KSD exposes KSD to KRX operational risks. - KRX has bank criteria for settlement banks and monitors compliance; cooperates and shares information with KSD and BOK; can modify settlement deadlines/dates in case of KSD system failure. - Recovery and orderly wind-down: - KRX has not developed recovery plans containing scenarios or recovery strategies; no recovery strategies developed. - For extreme cases beyond current financial resources, KRX plans to establish rules and regulations for additional loss bearing by member firms, handling procedures and amendment of relevant regulations in consultation with authorities and members (manual for handling a settlement default; article 107 of DM business regulation). - KRX is working on a resolution scheme for orderly arrangements together with the FSC to manage unexpected bankruptcy of the CCP. - Key conclusions for Principle 3: - Company-wide risk management framework exists with policies, tools, governance and default procedures; framework recently implemented and requires departments and market oversight to identify, monitor and manage risks; board sets risk limits. - Framework reviewed annually and includes external stakeholder risks; regularly assessed through independent audits. - Lack of recovery or orderly wind-down planning is an issue of concern given systemic importance. - Assessment of Principle 3: Broadly Observed - Recommendations (Principle 3): - Develop a recovery plan in line with PFMI and CPSS/IOSCO guidance that: (i) identifies critical operations; (ii) contains scenarios preventing provision of critical operations; and (iii) strategies to support recovery of critical operations. - Develop plan in close cooperation with the FSC and the BOK and review/update regularly. ### Credit risk management and CCP financial resources (Principle 4) - Credit risk framework components: - Risk management policy, regulations and guidelines. - Settlement risk management system to measure, monitor and reduce credit exposures. - Governance: risk management committee and department. - Escalation tools and default procedures. - Supporting regulations and guidelines (listed): - Regulation on asset management; - Guideline for the management of the joint compensation funds (JCFs); - Guideline for the management of the settlement reserves; - Guideline for the use of financial resources for providing liquidity; and - Guideline on margin management. - Systems and real-time monitoring: - Settlement risk management system, collateral system in clearing and settlement system, margining system COMS, and EXTURE real-time settlement monitoring. - Settlement risk management system functions include: management of potential participant default risk; calculation of maximum settlement amount per member; calculation of market risks of settlement positions; management of margin rates for derivatives by measuring volatility; management of intraday risk by estimating intraday gains and losses. - For DM margins, COMS determines margin requirements per individual risk management account. - Governance and oversight: - Clearing and settlement department responsible for clearing/settlement services and managing credit risk. - Risk management department and committee review enterprise-wide credit risk framework quarterly or more frequently. - Internal audit verifies adequacy annually or occasionally and suggests improvements. - Default procedures: - Default procedures described in principle 13 (document reference). - Buy-in procedure: where a clearing member fails to deliver securities, CCP activates buy-in to purchase securities on behalf of failing member (KOSPI 75-10); failing member must pay loss caused by settlement delay. - Sources of credit risk identified: - Losses from non-receipt of funds due to participant default. - Losses from default of issuers of collateral posted with KRX. - Credit risk controls and tools: - Monitoring of clearing member compliance with participation requirements. - Monitoring exposures via settlement risk management system. - Collection of initial and variation margin for derivatives positions. - Collection of joint compensation fund (JCF) for securities and derivatives markets. - Maintenance of settlement reserves. - Conducting stress tests to determine potential future credit exposures in stressful market conditions. - Margins and confidence levels: - Member margins for settlement positions are collected at 99.7 percent confidence level (guideline on margin management). - Composition of CCP financial resources (exact items and markets): - Securities market: - Joint compensation fund (contribution defaulter); - Joint compensation fund (contribution other members); and - Capital of the KRX, including the settlement reserves. - Derivatives market: - Member margin; - Joint compensation fund (contribution defaulter); - Joint compensation fund (contribution other members); and - Capital of the KRX, including the settlement reserves. - Joint Compensation Fund specifics: - FSCMA article 394 requires every KRX member to contribute to KRX joint compensation fund to compensate losses following default of a clearing member. - Separate joint funds for securities market and derivatives market. - Total size of the joint compensation fund for each of the securities and derivatives markets is KRW 200 billion (membership regulation). - KRX can require full replenishment if joint compensation fund is used to cover losses. - Contribution calculation for securities market: - Basic contribution of KRW 1 billion. - Plus: [ratio of average daily trading value of the member to total average daily trading value of all contributing clearing members for one year retroactive from end of previous quarter] multiplied by (total joint compensation fund value minus total basic contribution and other contributions). - Contribution calculation for derivatives market: - Basic contribution of KRW 1 billion. - Plus: [ratio of average daily margin value of the member to total average daily trading value of all contributing clearing members for one year retroactive from end of previous quarter] multiplied by (total joint compensation fund value minus total basic contribution). - Additional financial resources: - Own assets of the KRX, including settlement reserves. - KRX deposits part of retained earnings as settlement reserves as additional cushion pursuant to article 54 of articles of incorporation. - Risk profile and future product plans: - At present KRX does not clear products with more-complex risk profiles. - KRX plans to provide clearing service for OTC KRW-IRS from June 2014 and is considering other OTC instruments like CDS which have more-complex risk profiles. - Stress testing (Key consideration 5 and 6): - Daily stress tests conducted at 99.99 percent confidence level to determine adequate size of financial resources; objective to maintain sufficient resources to cover losses following default of participant generating largest credit exposure. - For derivatives accounts, KRX determines “value at risk in normal circumstances” (VaR model) and “value at risk in emergency situations” (stress tests) daily. - Settlement risk management system supports daily monitoring of credit exposures. - Risk management department compares largest credit exposure in stressful market conditions with current financial resources (margins, JCF, settlement reserves, other resources) to check adequacy. - When market volatility increases or liquidity decreases, clearing and settlement department immediately updates stress test results; risk management department appraises sufficiency and decides on expansion. - Financial resources held by KRX at end of 2012 are sufficient to cover value at risk in the event of default of participant with largest exposure in recent years. - KRX regularly reviews adequacy of scenarios; adds or adjusts scenarios when measured values exceed pre-set values or abrupt market emergency occurs. - Historical crisis scenarios considered: financial crisis in 1997, 9-11 attacks in 2001, sub-prime mortgage crisis in 2007, Lehman Brothers default. - KRX validates risk management model annually and develops improvement plan; internal audit occasionally verifies adequacy and recommends improvements. - KRX planned to introduce back-test and sensitivity analysis to validate margin calculation methods in 2013. - Supporting rationale and governance: - Clearing and settlement department conducts daily stress tests; results stored and forwarded to risk management department quarterly. - Risk management department calculates and manages adequate capital based on stress testing per article 7 of risk management regulation. - If insufficiency identified, risk management committee may propose to board to raise settlement reserves or joint compensation fund. - Key conclusions for Principle 4: - KRX has frameworks, systems and governance for credit risk measurement, monitoring and management including margins at 99.7 percent and daily/99.99 percent stress testing. - Joint compensation funds targeted at KRW 200 billion per market and basic member contribution KRW 1 billion. - KRX preparing to expand products to OTC IRS and possibly CDS, which would change risk profile and may require additional resources and assessments. - Assessment of Principle 4: (assessment label provided in source text for the principle section beginning; full assessment not repeated verbatim here) - Recommendations (Principle 4): - Continue to validate and enhance stress-testing methodologies, back-test and sensitivity analyses, and ensure governance arrangements document rationale for total financial resources maintained, especially in light of planned clearing of OTC KRW-IRS and potential CDS clearing. *Source: _cr14308 - 393. The FSCMA specifies the business scope of a CCP including* ### 2008. The scenario with the highest historical volatility appears to be ### _cr14308 - 2008. The scenario with the highest historical volatility appears to be ### Credit exposures, allocation of credit losses, and replenishment - The scenario with the highest historical volatility appears to be the Lehman Brothers crisis, with a simultaneous decrease of the KOSPI200 index by 26.5 percent and an increase of the U.S. dollar by 3 percent. The KRX uses the Lehman Brothers scenario to calculate credit exposures in extreme market conditions. - To measure credit exposures in stressful market conditions, the KRX calculates losses that may occur during the liquidation of the position in case of the default of the participant that would potentially cause the largest credit exposures to the KRX. - Allocation of credit losses: - The KRX has established explicit rules and procedures to handle the case of settlement default by members (manual for handling settlement default; article 107 of the DM business regulation). - Replenishment of financial resources: - If the joint compensation fund has been used up following non-fulfillment of settlement obligations, the KRX can require participants to make additional contributions according to the decisions of the board pursuant to article 23 of the membership regulation. - If settlement reserves have been fully used, the KRX may deposit more funds by getting approval from the board. - Key conclusions (Principle 4): - The KRX identifies credit and liquidity risks from its CCP activities and monitors credit exposures per clearing account in real time. - For the derivatives market credit risks are generally properly identified and monitored using margin, joint compensation fund contributions, settlement reserves, and daily stress testing. - Shortcomings noted: - No back testing or sensitivity analysis of margin model (plans to introduce in autumn of 2013). - Credit risk models, including margin models, are not validated by an independent entity. - Affiliated members not yet considered. - Risk management waterfall does not reflect PFMI requirement that part of KRX capital be taken before financial resources of surviving clearing members (skin the game). - Assessment of Principle 4: Partly Observed - Recommendations (selected): - Reform credit risk framework for the securities market by collecting risk-based collateral (margin). - Reconsider fixed-size joint compensation fund requirement; contribution should be based on exposures rather than transaction volumes. - Continue planned introduction of back testing, sensitivity analysis, and skin in the game. - Ensure annual independent review and validation of credit and margin models. - Account for affiliates in credit risk calculations. *Source: IMF staff report content provided* ### Collateral eligibility, valuation, haircuts, and concentration (Principle 5) - Eligible collateral (joint compensation fund): - Cash, government bonds or monetary stabilization bonds, listed in the KOSPI market. - For every clearing member the value of the bonds shall not exceed half of the amount of the clearing member’s total contribution to the fund. - Eligible collateral (derivatives margin): - Domestic and foreign currencies, domestic securities, and foreign government bonds (DM market regulations articles 88 and 128; enforcement rules article 92). - Eligible foreign currencies (listed): - U.S. Dollar; Japanese Yen; European Union Euro; British Pound; Hong Kong Dollar; Australian Dollar; Singapore Dollar; Swiss Franc; Canadian Dollar. - Eligible domestic securities: - Stocks listed on the KOSPI market and the KOSDAQ market; Bonds listed on the KOSPI Market. - Eligible foreign government securities: - Short-term U.S. treasury Bills; Mid-term U.S. treasury Notes; Long-term U.S. treasury bonds; Other foreign securities. - Valuation practices: - Foreign currencies converted daily based on the basic exchange rate of the same day or previous day (in the case of US dollars). - Foreign securities basic market price determined by averaging market prices provided consecutively in the recent five trading days. - Mark-to-market daily for all collateral types except bonds; bonds marked weekly. - Haircuts (set by asset class): - 20–40 percent for listed stocks, including ETFs and DRs; - 5–20 percent for listed bonds; - 5 percent for foreign currency; - Treasury bills with maturity of 1 year or less: 8 percent; - Treasury notes with maturity of 10 years or less: 12 percent; - Treasury bonds with maturity of 10 years or more: 16 percent. - Monitoring and adjustments: - KRX monitors price volatility, market liquidity and other variables every day and may adjust haircuts; KRX does not stress-test haircuts. - Concentration: - KRX accepts a range of collateral types to avoid concentration. - Listed bonds composition: government bonds approximately 60 percent, corporate bonds approximately 40 percent. - No U.S. government securities deposited as collateral at the end of February 2013. - No regulatory collateral concentration limits currently; planned collateral-weight monitoring function in next-generation system scheduled to be launched in February 2015. - Cross-border collateral: - KRX designated U.S. government bonds acceptable as of March 18, 2013; opened foreign currency accounts at the KSD and an international custodian bank; opened a link account at KSD to transfer ownership to KRX as mortgaged property. - Collateral management system: - Code numbers of acceptable asset classes are registered; collaterals automatically validated at deposit. - Securities deposited at KSD; cash and foreign currencies deposited in settlement banks. - No reuse of collateral; reuse strictly prohibited by law. - BCP manual with BCP drills executed 3 times a year. - Key conclusions (Principle 5): - KRX has clear policies on eligible collateral and conservative haircuts; majority of collateral is government bonds. - Collateral is marked to market daily except bonds (weekly). - Collateral arrangements lack concentration limits. - Assessment of Principle 5: Broadly Observed - Recommendations: - Develop a concentration limit policy. - Mark bond collateral to market on a daily basis. - Implement stress tests to assess adequacy of haircuts. *Source: IMF staff report content provided* ### Margin methodology, coverage, and model governance (Principle 6) - Scope: - KRX does not calculate margins for KOSPI and KOSDAQ securities markets. - For the DM the KRX uses the Composite Optimized Margin System (COMS), a mixed pre-and post-margin system. - Operational details: - Pre-margin deposited only by customers (customers except qualified institutional investors must deposit customer margin with clearing member before submitting an order). - Clearing members deposit post-margin and customers’ margins at settlement banks or KSD for securities collateral. - Post-margin is deposited by clearing members and institutional investors at noon on T+1. - Price data and estimation: - Margin calculations based on end-of-day prices from KRX trading systems; theoretical prices used if end-of-day data unavailable (article 96 DM business regulation). - Secondary IT site as backup; bond prices from external providers. - Theoretical prices derived from nearest month contract and further contracts if needed; methodology described in enforcement rules. - Initial margin model: - Portfolios constituted by product group (stock index, stock group, interest rate, currency, commodity). - 42 virtual scenarios based on potential price and volatility changes using VAR. - Margin amount determined per product group based on the maximum net loss calculated with a 99.7 confidence level and using a 2-day close-out period. - Sample periods: 20, 60, 120, 250, 1000 days. - Close-out period set at 2 days for all product groups; in stress KRX assumes more than 5 days in historical stress test scenarios. - For options margin, option volatility considered since October 2010. - Variation margin: - Positions marked to market daily; KRX collects variation margin at noon on T+1. - Option premium margin calculated daily. - Portfolio margining: - Offsets allowed within product groups; margin reduction uses delta conversion, margin per contract and price correlation coefficient. - Cross-margining not offered (no link with another CCP). - Model robustness and testing: - KRX plans to introduce daily back testing of margin model in 2013. - No current sensitivity analysis; planned to start August 2013 alongside back testing. - Margin model validation planned; DM business regulation amendment to allow intraday margin calculations in 2014. - Key conclusions (Principle 6): - For derivatives, COMS covers exposures with initial margin at 99.7 confidence and 2-day close-out. - KRX lacks operational capacity for intraday margin calls. - Further improvements needed in back testing, sensitivity analysis, and annual independent validation. - Assessment of Principle 6: Broadly Observed - Recommendations (selected): - Develop intraday margin arrangements. - Better substantiate 2-day close-out period per product. - Consider position concentrations that may lengthen close-out timeframes. *Source: IMF staff report content provided* ### Liquidity risk framework and stress testing (Principle 7) - Liquidity risk sources: - Failure of clearing members, settlement banks, nostro agents, custodian banks, liquidity providers. - KRW cash payments in securities and derivatives markets; foreign currency final delivery for FX derivatives (USD, JPY, EUR). - Monitoring and tools: - Real-time monitoring of members’ securities delivery and cash payments. - Lines of credit opened with KSFC and three commercial banks (credit ratio of at least 8 percent); FX credit line with Korea Exchange Bank for FX derivatives. - Available credit lines and use designated as management indicators; quarterly reporting of credit line info to risk management department. - Sufficient liquid resources: - Liquid resources include committed credit lines, settlement reserves and joint compensation fund; credit lines are committed. - Amount in KRW determined using largest historical aggregate payment obligation from historical stressful market conditions and extreme value theory and GPD. - For foreign currencies KRX does not determine amount because final delivery of FX derivatives occurs monthly and payment amounts in foreign currencies are low compared to KRW; KRX can borrow foreign currencies via FX credit line. - Largest historical aggregate payment obligation and extreme value well below available liquid resources. - Qualifying liquid resources: - Credit lines spread across KSFC and 3 commercial banks with high capital ratios. - Collateral and cash from settlement reserve and joint compensation fund invested in KTBs and MSBs. - KRX can access credit lines and other resources on the same day in case of default. - Supplemental liquid resources: - KRX has no supplemental liquid resources; has access to intraday credit facility of the BOK. - Liquidity provider due diligence: - Liquidity providers must have capital amount more than KRW 8.0 trillion, capital ratio at least 10 percent, delinquency rate less than 4 percent. - KRX monitors financial statements via FSS website. - KSFC credit rating is AAA. - Credit lines mature 6 to 12 months; KRX reviews credibility near expiration before renewal. - Stress testing program: - Daily calculation of liquidity need using extreme value theory. - Monthly calculation of extreme value of potential payment obligation. - Quarterly review of sufficiency of liquid resources. - Annual mock tests using default scenarios. - Key conclusions (Principle 7): - KRX has effective liquidity risk management framework; stress tests daily and monthly and quarterly reporting to risk management committee. - KRX does not stress its liquidity needs for foreign currencies. - Assessment of Principle 7: Observed - Recommendation: - Implement stress testing exercises for foreign currencies. *Source: IMF staff report content provided* ### Settlement finality (Principle 8) - Point of settlement finality: - Stocks: settlements conducted on a real time basis from 9 a.m. on settlement day (T+2). - Government bonds: settlement on a real time basis from 9 a.m. on settlement day (T+1). - Repo and other bonds: settlement on a real time basis from 3:00 p.m. on trading day (T+0). - For derivatives a transaction is final at the moment that the KRX has determined the net obligations of its clearing members (DM business regulation article 103). - Legal protections: - Debt Rehabilitation and Bankruptcy Act articles 120 and 336 provide CCP priority and protection for assets kept as margin or joint compensation fund. - KSD regulation article 14-2 prevents cancellation of book-transfer entries once made. - Settlement of cash leg of securities transaction conducted in BOK-Wire+ achieves real-time finality. - Key conclusions (Principle 8): - Securities settlements are final as soon as settlement account debited or credited in real time during settlement day. - Derivatives transactions are final when KRX determines net obligations per clearing member. - Assessment of Principle 8: Observed - Recommendation: - KRX can improve DM regulations to specify the point after which members’ obligations may not be revoked by a clearing member. *Source: IMF staff report content provided* ### Money settlements and settlement bank arrangements (Principle 9) - Use of central bank money: - Cash leg of stocks, government securities and repos settled in central bank money via BOK-WIRE+. - Retail bonds settled in commercial bank money (T+0). - Cash payments following derivative transactions settled in commercial bank money (including foreign currency delivery). - Cash deposits of collateral conducted in commercial bank money. - Reasons and provisions: - Not all clearing members have access to BOK-WIRE+; derivatives commercial bank money considered more convenient. - Government bonds settled on T+1 central bank money; intraday liquidity via repos introduced February 2012 and daily settlement window start moved from 3 p.m. to 9 a.m. - Settlement bank selection and monitoring: - Settlement banks must have capital ratio at least 8 percent. - KRX monitors compliance monthly using FSS reporting. - KRX may cancel designation if capital adequacy ratio falls below 8 percent or FSC imposes management improvement measures. - Contracts with settlement banks have no expiration date. - Key conclusions (Principle 9): - Securities market money settlements largely in central bank money, except retail bonds. - Derivatives settled in commercial bank money via six commercial banks. - KRX has limited set of criteria for settlement banks and monitors monthly. - Assessment of Principle 9: Observed - Recommendations: - Increase requirements for settlement banks and monitor compliance regularly. - Consider including an expiration date in contracts with settlement banks. - Further investigate replacing commercial bank money arrangements with central bank money for derivatives. *Source: IMF staff report content provided* ### Physical deliveries (Principle 10) - Gold derivatives: - Eligible for physical delivery; KRX guarantees delivery of gold to buying clearing members and cash payment to selling clearing members. - Gold bars: 1,000 gram bars, purity higher than 99.99 percent, with refinery/brand name, weight, purity and manufacturer’s serial number engraved. - Last trading day procedures: buying and selling clearing members inform KRX of transaction details within thirty minutes after market close; sellers inform whether gold bar is imported and tariff-free status; buyers inform taxation exemption eligibility of receiver. - KRX nets quantities and allots physical delivery quantities; delivering member deposits gold bars at KRX account at designated warehouse (currently the KSD); KRX conducts payments to delivering clearing members and delivers gold bars to receiving members after approval. - Margins and protections: - Physical delivery margin required (Annex 18) to cover potential KRX losses in delivery process. - KRX checks existence of member’s gold account before participation in gold market. - Article 37 DM enforcement rules protects KRX against loss or expenses related to damage; clearing member or warehouse operator (KSD) can be held responsible. - Key conclusions (Principle 10): - DM business regulations and enforcement rules specify processes, controls, and physical delivery margin. - Assessment of Principle 10: Observed - Recommendation: - Improve DM rules by more explicitly specifying KRX’s role as CCP in the delivery process. *Source: IMF staff report content provided* ### Central Securities Depository matters (Principle 11) - Content for Principle 11 marked N/A in provided material. - Assessment of Principle 11: N/A - Recommendations and comments: none provided. *Source: IMF staff report content provided* ### Exchange-of-value settlement systems and DVP arrangements (Principle 12) - KRX applies different DVP arrangements by market: - Exchange traded securities (KOSPI and KOSDAQ): DVP model 3, settlement on T+2, using KSD intermediary account. - Exchange traded corporate bonds/retail bonds: DVP model 3, netting securities per member and per ISIN and netting cash per member, settlement on T+0. - Korean treasury securities: DVP model 3, netting securities and cash per member and per issue, settlement on T+1; nets on bilateral basis. - OTC traded stocks by institutional investors: KSD applies DVP model 2, settlement on T+2. - OTC traded stocks: KSD applies DVP model 3, settlement on T+2. - OTC traded bonds: KSD applies DVP model 1, settlement on T+1. - Derivatives market: upon expiration/exercise settlement members deliver net settlement cash and net settlement underlying asset to KRX. - Legal enforceability: - Settlement business regulation of KSD stipulates that settlement of an obligation can be made only if all other linked obligations are settled (articles 18, 19, 19–8, 19–9, 22–5, 22-6). - Final settlement enforceable under FSCMA and KSD settlement business regulations. - Key conclusions (Principle 12): - KRX eliminates principal risk using appropriate DVP models across products. - Assessment of Principle 12: Observed *Source: IMF staff report content provided* ### Participant-default rules, procedures and default management (Principle 13) - Legal and procedural framework: - Default rules in FSCMA and KOSPI, KOSDAQ and DM business regulations supplemented by KRX guidelines and a default management manual. - FSCMA permits use of member collateral (margin, joint compensation fund, settlement reserve) in member default (articles 394 and 395). - Risk management waterfall defined in guidelines and regulations (articles cited in source). - Historical example: - KRX declared default of Lehman Brothers Securities Seoul branch in September 2008; securities purchases made to complete settlement; derivatives positions liquidated with survivor help after grace period for voluntary close-out. - Use of financial resources in default: - (a) Financial resources of defaulting member (margin, joint compensation fund). - (b) Joint compensation fund of non-defaulting members. - (c) Settlement reserve comprising part of KRX own capital. - KRX adjusting order of commitments to comply with PFMI recommendation that CCP capital be used before surviving members’ funds (skin in the game). - Preparedness and testing: - Clearing and settlement manual specifies actions, roles, responsibilities and timelines. - Default actions include crisis task force, suspension, blocking assets, exercising collateral rights, reporting to management/board/FSS/FSC. - Head of clearing and settlement determines default, reports to CEO, configures countermeasure team, and conducts resolution. - Comprehensive emergency contact list in place. - Default drills conducted once a year; manual updated with lessons learned; results reported to management and board. - Disclosure and stakeholder involvement: - Default rules and procedures publicly available on KRX homepage; not all guidelines disclosed in English. - Drills involve participants, settlement banks, liquidity providers, BOK and simulate defaults with two clearing members participating. - Key conclusions (Principle 13): - KRX has developed default rules and procedures with discretionary powers and tested manual annually with stakeholder involvement. - Assessment of Principle 13: Observed - Recommendations and comments: - Further articulate: actions available when default declared; automatic vs discretionary actions; potential changes to settlement practices; treatment of transactions at different processing stages; treatment of proprietary vs customer transactions; sequencing of actions; roles and responsibilities of parties including non-defaulting participants; other mechanisms (e.g., auctions). - Internal plan should be reviewed at least annually or after significant changes. *Source: IMF staff report content provided* ### Segregation and portability of customer positions (Principle 14) - Customer protection and account segregation: - Customer positions and collateral protected via segregation: - Customer positions held in individual accounts in books of clearing member. - KRX holds customer positions separately from clearing members’ positions. - Customers’ securities collateral kept in KSD with individual accounts for every customer. - Customers’ cash collateral held in KRX account at settlement banks; omnibus account segregated from KRX proprietary account. - Members must specify whether orders are on behalf of customer or proprietary. - Legal basis: - FSCMA articles 74 and 75, KOSPI regulation article 9, DM business regulation articles 65 and 88-5 require separate accounts and protection of customer assets. - DM business regulation article 139 prohibits members from using customer deposits for other purposes. - Account structure and portability: - Account structures enable quick identification of customer positions and collateral. - KRX cannot directly monitor individual customer positions during normal business due to Act on Real Name Financial Transactions and Guarantee of Secrecy; KRX can access individual account information for specific purposes subject to FSC approval. - Portability arrangements exist for securities and derivative accounts (membership regulation article 14). - Customer may select new participant to transfer positions and collateral; KRX can designate another participant if transfer difficult. - Transfer process: legal agreement between customer and new clearing member submitted to KRX; transfer executed 8 p.m.–9 p.m. after requests between 3.45 p.m. and 5 p.m.; real-time monitoring and collateral transfer facilitated. - Disclosure: - Rules, policies and Act on Real Name Financial Transactions publicly disclosed on KRX homepage. - Key conclusions (Principle 14): - Segregation and portability arrangements in place; supported by legal framework and publicly disclosed. - KRX cannot monitor individual client positions in normal course but can ensure transfer in crisis. - Assessment of Principle 14: Observed - Recommendation: - Extend portability provisions for the securities market using similar rules as derivatives market. *Source: IMF staff report content provided* ### General business risk, capital and recovery planning (Principle 15) - Risk management framework: - General business risk included in company-wide risk framework; reported quarterly by business departments to risk management department and committee. - KRX defines general business risk thresholds: - Acquisition/disposition of real estate worth KRW 10 billion or more; - Investment/disposition of KRW 5 billion or more or 30 percent of other entity; - Investment in new business with value KRW 5 billion or more. - New business proposals reviewed by risk management department and risk management committee. - Capital and liquid net assets (end of 2011 and 2012): - End of 2011: - Capital: KRW 2.13 trillion; - Cashable assets including cash and short-term financial products: KRW 364 billion; - Liquid securities: KRW 893 billion. - End of 2012: - Capital: KRW 2.19 trillion; - Cashable assets including cash and short-term financial products: KRW 518 billion; - Liquid securities: KRW 730 billion. - KRX holds adequate liquidity (KRW 40 billion) necessary for stable operation; amount based on external professional evaluator (Zeroin). - Recovery and wind-down: - KRX has no plans for recovery and orderly wind-down. - Liquid net assets at end of 2012: KRW 431 billion (liquid assets: KRW 519 billion, liquid liabilities: KRW 59 billion). - Estimated six months operating expenses: KRW 137.5 (personnel KRW 42.9; other expenses KRW 94.5) based on 2012 data. - Asset quality: - Liquid assets composed of cash, cashable assets and short-term financial products. - Capital raising: - Annual plans to raise additional capital if needed; board of directors decides on issuance of new stock. - Key conclusions (Principle 15): - KRX identifies general business risk and holds sufficient liquid net assets funded by equity to continue operations if losses materialize. - Lack of recovery or orderly wind-down plan; no explicit link between liquid net assets and required time to maintain critical operations. - Assessment of Principle 15: Observed - Recommendations: - Develop recovery plan linking size of liquid net assets to length of time required to maintain critical operations and reassess settlement reserves. *Source: IMF staff report content provided* ### Custody and investment risks (Principle 16) - Custody arrangements: - Domestic/foreign cash transferred to KRX account at settlement banks. - Domestic securities: KRX obtains right of pledge; securities held in member’s account at KSD. - Foreign securities: members deposit securities at KSD account at Citi Bank; securities pledged to KRX. - KSD segregates its own assets and participants’ proprietary and customer assets; participant investor account book is a legal ledger. - Settlement bank and custodian selection: - Settlement bank for foreign securities selected by KSD after consultation with KRX; commercial bank with capital ratio at least 8 percent. - Settlement banks for cash collateral must have equity capital ratio above 8 percent; selected banks act as custodian and settlement banks. - Contracts with settlement banks have no termination date; can be terminated if capital ratio falls below requirement or FSC regulatory measures apply. - Access to assets: - KRX can access its own and participants’ assets within a day; tested during annual default management drill and operational BCP tests. - Custody risks spread across different custodians. - In case of liquidity problems KRX may use credit lines (secured for KRW 1 trillion and unsecured for KRW [text truncated in source]). - Key conclusions (Principle 16): - Collateral and participant assets held at supervised entities with segregation and controls; KRX has prompt access to assets when required. - Assessment of Principle 16: Observed *Source: IMF staff report content provided* ### 2.5 trillion). ### _cr14308 - 2.5 trillion) ### Principle 16 — Custody and Investment of Assets - Key practices and limits: - KRX monitors the capital ratio of its settlement banks (custodians) on a monthly basis. - KRX monitors concentration of cash and foreign currencies deposited at custodian banks on a daily basis. - KRX monitors deposit ratio per custodian and prevents a settlement bank from exceeding 60 percent of the total deposits; if exceeded, KRX transfers part of those deposits to another settlement bank. - KRX documented management procedure of settlement banks in 2011 to prevent concentration; collateral deposit weight per settlement bank also limited not to exceed 60 percent of total deposit. - Investment policy: proprietary assets and clearing members’ and customers’ assets may only be invested in safe and liquid assets as described in the fund management regulation, the settlement reserve management regulation and the guideline for the management of the default fund. - Investments prohibited in shares; joint compensation fund and settlement reserve may only be deposited at settlement banks that comply with selection criteria and invested in government bonds and monetary stabilization bonds. - Gains or losses from member margin deposited in cash or foreign currency are included in margin calculations for both clearing members’ own positions and clients’ assets. - Key conclusions and assessment: - KRX holds its own and its participants’ assets at supervised and regulated entities. - Selection criteria and monitoring do not ensure custodians have robust accounting practices, safekeeping procedures, and internal controls that fully protect assets. - KRX does not perform tests to determine ability to manage losses following default of the custodian with the largest exposure. - Investment strategy supports timely liquidation; investment strategy is not publicly available in English. - Assessment of Principle 16: Broadly Observed - Recommendations and comments: - Selection criteria for custodians should ensure robust accounting practices, safekeeping procedures, and internal controls. - Ensure foreign collateral held in custody by foreign banks is protected against claims of the custodian’s creditors. - Ensure custodian banks have strong financial positions to sustain losses from operational or non-custodial activities. - Reconsider the 60 percent cap on value of assets held by one custodian based on analysis of ability to withstand default of a custodian holding 60 percent of assets. - Disclose investment policy in English. ### Principle 17 — Operational Risk - Framework and governance: - KRX is not outsourcing operational activities or major businesses to third parties. - Operational risk management framework: companywide policies and procedures; operational risk management system; governance (risk management committee); contingency plans. - Early 2013: KRX introduced operational risk management regulation; each business division required to appoint a risk manager. - RCSAs and KRIs conducted regularly by divisions; reported to risk management department and risk management committee. - Operational risk components: business operations, IT risks, legal risks, reputational risks. - Risk management committee is a subcommittee of the board; composed of president of management and strategy division and 2 non-executive directors (1 legal expert and 1 financial expert); receives quarterly operational risk reports. - Internal audit office validates adequacy through annual and special audits; operational risk management not subject to external audit (internal audit hires external professional organization). - Systems, security, capacity, BCP: - Documented procedures: system operation, service continuity, capacity management, incident management, failure control, problem management, change management, release management. - Anti-fraud and employee integrity: Code of Conduct, Code of Ethics, Guideline on Investment in Financial Instruments (for employees), Guideline on Handling and Management of Important Information; Cyber Tipping Center for tips. - Information security: IT Quality and Security Team; ISO 27001 acquired in 2009; certification inspections every six months (latest revision December 2012). - Capacity: system capacity checked monthly; next generation trading system and clearing and settlement system scheduled operational in February 2014 and 2015 respectively. - Business continuity: disaster recovery exercises quarterly with entire company; clearing & settlement department conducts annual connectivity tests with settlement banks to DR site. - Sites: two primary sites in Seoul and Busan; each primary has (hot) secondary site approximately 50 kilometers away; the two primaries function as each other’s (cold) site with distance approximately 500 kilometers. - Real time data synchronization available for each primary and its secondary site; no real time synchronization possible between Busan and Seoul due to distance; "Data loss is however small." - Recovery time objective (RTO) prescribed in FSS regulations: 3 hours. - Conclusions and assessment: - KRX has operational risk management framework, scalable capacity, physical and information security policies, BCP and secondary/third sites; BCP regularly tested. - RTO is 3 hours which allows same day settlement, but is not fully in line with PFMI prescribed RTO of 2 hours. - Assessment of Principle 17: Observed - Recommendation: - KRX, with the FSS, should adapt regulatory framework to accommodate an RTO of 2 hours in line with the PFMI. ### Principle 18 — Access and Participation Requirements - Membership criteria: - Supervisory: license of the FSC to engage in investment trading or investment brokerage business. - Financial: - Clearing members: net capital ratio at least 180/100; equity capital no less than KRW 10 billion. - Non-clearing members: net capital ratio at least 150/100. - Operational: adequate facilities including necessary IT equipment; adequate manpower with expertise and integrity. - Social credibility: sufficient social credibility. - Voluntary withdrawal: an entity that voluntarily withdrew shall not be admitted before three years have elapsed. - Requirements described in FSCMA (articles 387 and 388) and membership regulation (articles 7, 8, and 23). - Justification, monitoring, disclosure: - Criteria justified to ensure safe and efficient clearing/settlement. - Same financial membership criteria applied to securities and derivatives; different margin schedules for derivatives. - KRX reviews appropriateness of membership criteria annually; criteria publicly disclosed in KRX membership regulations on KRX website. - Compliance monitoring: member firm service team examines applicants and monitors compliance; settlement management index based on net capital ratio, settlement resource GAP and credit ratings; participants submit financial information monthly; members must report certain events and may be requested to implement corrective measures or disciplinary actions. - Suspension and orderly exit procedures publicly disclosed: revocation, dissolution, expulsion, suspension, fines. - Conclusions and assessment: - Access criteria allow fair and open access based on reasonable risk-related participation requirements; procedures for suspension/orderly exit are publicly disclosed. - Assessment of Principle 18: Observed ### Principle 19 — Tiered Participation Arrangements - Rules and monitoring: - Measures and procedures to manage defaults associated with indirect participants set out in KOSPI market business regulation and DM business regulation; members must prepare service agreements for customers (indirect participants) specifying obligations. - KRX monitors open interests and margin deposits per individual account in DM to identify significant settlement volume customers; KRX alerts direct participants about extraordinary settlement obligations of indirect participants in DM. - Legal constraints: current legal framework (article 4 of the ‘Act on real name financial transactions and guarantee of secrecy’) does not allow KRX to directly monitor indirect participants’ settlement capability or access detailed information in securities market. - In DM, margins are calculated and imposed per individual per account daily; open interests monitored real time; position limits and restrictions on accepting entrustments above position limits applied (Article 154 and 124 of DM business regulation). - Conclusions and assessment: - KRX regulates participant–customer relationships and can identify large positions in DM; cannot monitor customer settlement positions in securities market due to legal framework. - Assessment of Principle 19: Broadly observed - Recommendation: - KRX should increase ability to identify risks from tiered participation in the securities market. ### Principle 20 — Financial Market Infrastructure Links - All key considerations marked N/A; no active link assessments reported. - Conclusions and assessment: - Assessment of Principle 20: - - Recommendations and comments: - ### Principle 21 — Efficiency and Effectiveness - Participant consultation and review: - KRX collects opinions via public hearings when introducing new parameters, rules, regulations. - At least three times a year KRX convenes committee on clearing and settlement and a working-level council to identify market needs. - New system EXTURE+ (clearing and settlement and risk management) developed in response to participants’ needs. - Goals and performance: - KRX objective per FSCMA (article 373): “to secure stability and efficiency of the capital market.” - Annual business performance assessment report submitted to government; KRX uses number of settlement delays as parameter; maximum number of delays per market set at 5, planned reduction to 3. - Regular review mechanisms: - Market efficiency committee (FSC) reviews reduction of transaction costs; must approve changes in commissions or investments above threshold (fees/investments of KRW 10 billion or more in computer systems and ancillary facilities). - Internal audit and external audits by FSS and board of audit and inspection assess efficiency and effectiveness. - Clearing and settlement committee convenes at least 3 times per year. - Customer satisfaction surveys: government-administered annually; KRX telephone surveys twice a year. - Conclusions and assessment: - KRX consults participants regularly, is subject to government audits, and has mechanisms for regular review of efficiency and effectiveness. - Assessment of Principle 21: Observed ### Principle 22 — Communication Procedures and Standards - Communications and standards: - KRX uses proprietary communication network and proprietary message protocols: KRX access protocol with members; co-developed protocol with KSD; BOK message protocol with the BOK. - Conversion to internationally accepted standards (e.g., SWIFT) is technologically possible but costly. - KRX maintains ISO-20000-1:2005 certification on its system (EXTURE). - Conclusions and assessment: - KRX does not use internationally accepted communication procedures and standards; conversion is technically possible but costly. - Assessment of Principle 22: Broadly Observed - Recommendation: - Adapt internationally accepted communication network and procedures to eliminate manual interventions, reduce risks, and increase STP efficiency. ### Principle 23 — Disclosure of Rules, Key Procedures and Market Data - Rules and disclosure: - KRX has rules, regulations, and guidelines; rules do not always clearly distinguish trading and clearing activities since KRX offers both in same legal entity. - Various rules/regulations/guidelines published on KRX, FSC and other websites; English versions of several key regulations and guidelines are not available. - Website contains organizational information, rules, annual report; some descriptions of risk management and operational systems exist but a comprehensive document is missing. - KRX provides documentation, workshops, press releases, and training to facilitate participant understanding. - Fees and discounts publicly disclosed; trading and clearing fees specified by product; fee tables available on KRX website. - KRX completed CPSS-IOSCO Disclosure framework; published on its website since July 2013; statistical data disseminated via KRX homepage. - Conclusions and assessment: - KRX has disclosed rules and statistics on Korean website; some English material available but not all; CPSS-IOSCO Disclosure completed. - Assessment of Principle 23: Observed - Recommendation: - Disclose all rules, regulations and guidelines in English; improve clarity by separating clearing and trading activities and adopting PFMI concepts. ### Principle 24 — Disclosure of Market Data by Trade Repositories - Key considerations: N/A - Conclusions and assessment: - Assessment of Principle 24: N/A - Recommendations and comments: N/A ### Responsibilities: Regulation, Supervision, Oversight (A–E) — Key findings, assessments, and recommendations - Responsibility A: Regulation, Supervision, and Oversight of FMIs - Legal and institutional framework: - BOK oversight: BOK Act article 81 and ROMPSS articles 33–42 provide oversight powers; BOK-Wire+ identified as SIPS per ROMPSS article 35(2); article 37 prescribes PFMI as assessment standard. - FSC/FSS oversight: FSCMA articles 373–414 (KRX) and articles 294–323 (KSD); FSC supervises KRX and KSD; FSS may inspect on behalf of FSC. - Conclusions and assessment: - FMIs in Korea are subject to regulation and oversight by BOK and FSC/FSS; legal responsibilities suggest overlap. - Assessment of Responsibility A: Observed - Recommendation: - Establish consultative/cooperative framework (MOU) to ensure coordination between BOK and FSC where roles overlap. - Responsibility B: Regulatory, Supervisory, and Oversight Powers and Resources - Powers and constraints: - BOK: strong powers for BOK-Wire+ (real-time monitoring, article 43 sanctions) but limited powers to ensure implementation of suggestions by FMIs regulated by FSC or to verify authenticity/completeness of submitted information. - FSC/FSS: FSC has sufficient powers; FSS conducts on-site inspections; FSC may impose measures under article 411 (suspend business up to six months; order transfer, correction, disclosure, institutional warnings, sanctions against executives/employees). - Resources: - BOK oversight division: seven skilled staff; recruits private-sector experts; secures resources for training. - FSC: one senior expert and one seconded KRX staff — resources considered insufficient given workload and staff rotation. - FSS: three teams with 5, 4, and 5 staff respectively for securities, derivatives, and examination. - Conclusions and assessment: - Powers of FSC and FSS sufficient; BOK powers not fully effective for FMIs under FSC; BOK and FSS resources sufficient; FSC resources insufficient. - Assessment of Responsibility B: Broadly Observed - Recommendations: - Amend statute to empower BOK to obtain authentic information, ensure implementation of observations, and impose sanctions when required. - FSC should extend number of staff responsible for KRX matters. - Responsibility C: Disclosure of Policies with Respect to FMIs - Public disclosure: - BOK: policies defined in BOK Act, ROMPSS, WROMPSS; publishes payment & settlement systems report annually; should make disclosures available in an internationally used language and complete CPSS-IOSCO disclosure framework. - FSC/FSS: mandates reflected in FSCMA; publicly disclosed via official publications and websites. - Conclusions and assessment: - BOK, FSC and FSS publicly disclose policies; FSC/FSS lack a dedicated FMI site. - Assessment of Responsibility C: Broadly Observed - Recommendations: - BOK should publish relevant information in a language commonly used in financial markets in addition to domestic language. - FSC and FSS should provide dedicated FMI information on their websites. - Responsibility D: Application of the PFMI - Adoption and application: - BOK has adopted PFMI and uses it for oversight of BOK-Wire+ (ROMPSS article 37). - FSC publicly announced support for PFMI (June 19, 2012); intends to adapt FSCMA regulations to PFMI; OTC derivatives regulations in process; exchange-traded stocks, bonds and derivatives regulations not yet adapted to PFMI. - Consistency and cross-jurisdiction: - Lack of formal cooperation and BOK’s limited powers inhibit consistent application of PFMI across jurisdiction. - Conclusions and assessment: - PFMI adopted by BOK and supported by FSC; application incomplete for FMIs under FSC supervision. - Assessment of Responsibility D: Broadly Observed - Recommendations: - Provide adequate powers to BOK; update regulations under FSCMA in line with PFMI. - Responsibility E: Cooperation with Other Authorities - Current cooperation: - High-level cooperation exists between BOK and FSC (senior deputy governor of BOK is FSC commissioner; vice-chairman of FSC may attend MPC), but technical cooperation on FMIs is informal; no formal cooperative oversight MOU. - FMI operations council in BOK includes heads from KFTC, KRX, KSD; meets twice a year. - No crisis management arrangement or formal technical-level cooperation; duplication and inefficiencies exist. - Conclusions and assessment: - BOK and FSC do not appropriately cooperate on FMI regulation, supervision and oversight; informal arrangements impede effective oversight and crisis response. - Assessment of Responsibility E: Partly Observed - Recommendations: - Formalize cooperation between BOK and FSC (e.g., MOU with legal basis) to enable technical-level cooperation, joint assessments, crisis management arrangements, information exchange schedules, and joint meetings with FSS, KRX and KSD. - Authorities should “speak with one voice” and share assessments prior to finalization. ### Other notable facts and statistics - KRX deposit/concentration cap per settlement bank: 60 percent. - Recovery time objective (RTO) prescribed by FSS regulations: 3 hours. PFMI recommended RTO: 2 hours. - Distances: - Primary site to (hot) secondary site: approximately 50 kilometers. - Distance between Seoul and Busan primary sites: approximately 500 kilometers. - Membership financial thresholds: - Clearing members: net capital ratio at least 180/100; equity capital no less than KRW 10 billion. - Non-clearing members: net capital ratio at least 150/100. - Appendix ownership summary (as of January 31, 2013): - Total shares: 20,000,000 100.00 - KRX’s Treasury stock: 924,872 4.62 - (Source table provided by KRX Member Firm Services Team) *Source: KRX Member Firm Services Team.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14308.pdf_