## _cr14309 ## Source details **Canonical URL:** [_cr14309](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf.json) --- ### SUMMARY - Current securities regulatory framework in Korea achieves good overall compliance with the International Organization of Securities Commissions (IOSCO) Principles. - Legal impediments to international cooperation and exchange of information have been removed. - Since 2011, Korea applies the Korean International Financial Reporting Standards (K-IFRS) that follow the International Financial Reporting Standards (IFRS). - Regulatory structure is complex; responsibility for supervisory or enforcement action can lie with the Financial Services Commission (FSC), Securities and Futures Commission (SFC), or Financial Supervisory Service (FSS), and ultimate charge is not always clear. - Pre-deliberation committees at various levels further complicate processes; publication of additional information on decision-making structure and processes is recommended. - Operational cooperation includes agency representation in each others’ decision-making bodies; full participation of the Minister of Strategy and Finance at the FSC Board may risk compromising independence of FSC supervisory and enforcement decisions. - Recommendation: consider restricting participation of the Minister of Strategy and Finance in supervisory and enforcement decisions to mitigate undue political influence. - Ensure arrangements for gathering commercial input provide for equal and transparent treatment of market participants. - Authorities have a broad set of powers, most used effectively; expand on-site examination program to cover smaller entities, particularly asset management companies and auditors. - Improve oversight of small auditors to address auditor independence and quality control compliance challenges. - Continue on-site inspections focusing on proper handling of customer securities and funds. - Enforcement of unfair trading/market abuse provisions challenged by insufficiently dissuasive administrative sanctions and lengthy criminal enforcement outcomes; continue to seek improvements in administrative and criminal enforcement powers and processes in cooperation with the public prosecutor’s office. - Comprehensive disclosure requirements apply to issuers and collective investment schemes (CIS); monitor whether ongoing disclosure requirements best serve investors and market evolution while maintaining manageable compliance burdens. - Given investor risks from CIS custody and valuation shortcomings, monitor compliance and require market or fair value for all CIS. - Current processes to monitor systemic risk do not sufficiently acknowledge potential systemic risk arising from the securities sector. - Deficiencies in regulators’ arrangements to manage defaults could negatively impact ability to deal with market disruptions and institutional failures. ### INSTITUTIONAL AND MARKET STRUCTURE — OVERVIEW - Regulatory agencies (as established by the Act on the Establishment of the Financial Services Commission (AEFSC)): - Financial Services Commission (FSC): sets financial and supervisory policy across all financial institutions and markets in Korea. - Securities and Futures Commission (SFC): established under the FSC; deals with matters related to unfair trading on capital markets and accounting and auditing. - Financial Supervisory Service (FSS): conducts supervision, inspection and investigation of financial institutions under guidance and supervision of the FSC or SFC. - Other significant actors: Ministry of Strategy and Finance (MOSF), Bank of Korea (BOK), Korea Deposit Insurance Corporation (KDIC), Fair Trade Commission (FTC). - Overall supervisory model: integrated regulator/supervisor with internal functional diversification; FSS executes supervision of all financial institutions from separate departments. - Staffing and budgets: - FSC: 287 staff, about 20 in Capital Markets Bureau. - FSS: approximately 1750 employees, about 23 percent (404) dedicated to capital markets issues. - SFC: within the FSC, has separate Board but no staff or secretariat; relies on FSC staff as needed. - Interlocking governance and coordination: - Vice Chairperson of FSC serves as chairperson of SFC. - Governor of FSS serves on the board of the FSC. - Vice Minister of MOSF, President of KDIC and Deputy Governor of BOK are ex-officio commissioners of the FSC with full voting rights, including on supervisory and sanctioning decisions. ### MARKET STRUCTURE — KRX, KSD, KOFIA, PARTICIPATION - Korea Exchange (KRX) consolidated three markets in 2005: Korea Stock Exchange, KOSDAQ, Korea Futures Exchange (KOFEX). - KRX acts as central counterparty (CCP) for exchange-traded securities and futures markets. - Korea Securities Depository (KSD) is the central securities depository. - KRX links with Chicago Mercantile Exchange (CME) and Eurex for night trading of futures and options. - Market scale and characteristics (preserve numeric values exactly): - KRX listings: 1,788 listings. - Market Capitalization: USD 1,179.4 billion. - KOSPI 200 futures daily turnover: 7.4 million contracts (world’s most traded futures contract). - Market participation: more than 60 percent of trading originates with retail investors and another 20 percent from foreign investors; little institutional participation. - Table 2 (selected values preserved): - Number of Listed Companies: 2009: 1,788; 2010: 1,798; 2011: 1,816; 2012: 1,784 - Market Capitalization, USD Billions: 2009: 834.6; 2010: 1,091.9; 2011: 996.1; 2012: 1,179.4 - Market Capitalization, KRW Trillions: 2009: 971.9; 2010: 1,239.2; 2011: 1,147.6; 2012: 1,262.7 - Value of Bond Trading, USD Billions: 2009: 438.1; 2010: 515.6; 2011: 716.0; 2012: 1,285.6 - KOFIA: SRO with statutory functions including certification of securities professionals and pre-clearance of advertisements; membership not mandatory but effectively required to operate in financial services. - ATS/MTF were not permitted at time of on-site visit; law recently changed. March 2013 bill contemplates CCP for OTC derivatives clearing under KRX auspices. ### PRECONDITIONS FOR EFFECTIVE SECURITIES REGULATION - Multiple principal laws govern capital markets (listed in source): AEFSC; FSCMA; Act on the External Audit of Stock Companies; CPA Act; Use and Protection of Credit Information Act; Act on Real Name Financial Transactions and Confidentiality; Administrative Procedure Act; Framework Act on Administrative Regulations; Commercial Act; Government Organization Act; Act on Debt Rehabilitation and Bankruptcy; Act on the Structural Improvement of the Financial Industry. - Korea is a civil law jurisdiction; independent judiciary; prosecutors are officers of the courts. - Insolvency law supports finality of settlement, protection of customer funds held by securities brokers, and close out netting procedures. - Residual legal issues remain relative to the integrity of pledged collateral in indirect holding systems. - Deposit protection scheme and resolution arrangements extended to all financial institutions covered by the financial supervisory architecture. ### MAIN FINDINGS — GOVERNANCE, TRANSPARENCY, SUPERVISION, ENFORCEMENT - Governance and independence: - Complexity and interlocking governance can obscure decision-making responsibility and may permit undue political influence via ex-officio commissioners with full voting rights. - Recommendation: consider restricting participation of the Minister of Strategy and Finance (and related ex-officio roles) in supervisory and enforcement decisions to mitigate undue influence; provide more clarity and public information on decision-making structures and processes. - Transparency and stakeholder input: - Publish additional information on decision-making structure and processes; ensure commercial input arrangements treat market participants equally and transparently. - Improve feedback statements and transparency of the Regulatory Reform Committee’s (RRC) decision-making processes. - Supervision and inspections: - Expand on-site examination program to ensure coverage of smaller entities, especially asset managers and auditors. - Continue focus on proper handling of customer securities and funds. - FSS increased on-site exam staffing by 55 percent in 2013 compared to 2012; small asset management firms never subject to on-site examinations since inception to be subject to partial examinations in Q1 2014. - Audit oversight: - Improve oversight of small auditors; legislative proposals aim to strengthen quality control requirements for audit firms of listed companies and financial institutions. - FSS reviews approximately 10 percent of audit reports under its responsibility plus additional 5 percent for cause; audit quality review cycles vary by firm size. - Enforcement of market abuse: - Administrative sanctions often not sufficiently dissuasive; maximum amounts for civil money penalties and administrative fines are low. - Enforcement process is lengthy; average time from KRX examination/FSS investigation of an unfair trading case to decision by SFC: 382 days. - Public prosecutor’s indictment stage: on average 260 to 364 days in past five years. - Recommendation: jointly with public prosecutor’s office, seek ways to improve administrative and criminal enforcement powers and processes; FSS launched a dedicated unfair trading team on August 1, 2013. - Cooperation: - FSC and FSS signatories to IOSCO MMoU; practical cooperation adequate and timely; domestic MoU on macroprudential cooperation executed September 2012. - Disclosure, issuers, accounting: - Comprehensive primary, periodic and material event disclosure obligations; K-IFRS mandatory for specified entities since 2011. - Registration statement review timelines (preserve numeric deadlines exactly): - Stock-listed corporations: Equity securities public offering / Guaranteed rights offering: 10 days; Allocation to shareholders / Allocation to third parties: 7 days. - Debt securities: Guaranteed corporate bonds / Secured debentures / Asset-backed securities: 5 days; Others: 7 days. - Other securities: 15 days. - DART and KRX KIND systems provide electronic public access. - CRAs and other evaluators: - CRAs: registration, on-site examinations every 3–4 years, internal control and conflict of interest rules; assessment: Fully Implemented. - Bond pricing agencies and other evaluators regulated with registration and operational standards; assessment: Fully Implemented. - Collective Investment Schemes (CIS): - Total AUM (end-2012): 307,592 (unit: KRW billion). - Total Investment Trust (Sum): 296,605 (KRW billion). - Total Investment Company (Sum): 10,987 (KRW billion). - Public Offering Investment Trust Sum: 181,209 (KRW billion). - Private Placement Investment Trust Sum: 115,395 (KRW billion). - Hedge fund industry AUM: KRW 1,739 billion (end-2012). - Assessment: Broadly Implemented in many CIS areas; concerns on custody, valuation (money market funds valued at book value), limited FSS examination coverage for small CIS and custodians. - Recommendation: require market or fair value for all CIS; monitor custody and valuation practices; consider compulsory investor compensation arrangements for pricing errors. - Market intermediaries and capital: - Authorization requirements detailed; minimum capital unit thresholds preserved in source (e.g., equity capital of at least KRW 500 million per authorized business unit; advisory/discretionary business capital KRW 100 million per unit). - Net operating capital early warning level: 150 percent; remediation periods and reporting timeframes noted as potentially lengthy for fast-moving markets. - Assessments: Principle 29 Fully Implemented; Principle 30 Fully Implemented; Principle 31 Broadly Implemented. - Systemic risk monitoring and default procedures: - Cross-agency macro-prudential arrangements exist (MPFM convened since July 2012; MoU Sep 2012); KCIF provides daily real-time market monitoring. - Existing systemic risk monitoring does not sufficiently account for securities-originated systemic risk; perimeter, mapping and contingency protocols not fully documented. - KRX default/settlement gaps: definition of events of default, waterfall of resources, contingency plans and public documentation not readily accessible. - Key recommended actions for secondary markets and FMIs: - Document and make readily available definition of events of default, default mitigation arrangements, and order of resource use by financial investment business entities, KRX, KSD and any future CCP. - Document a contingency plan for financial disruption and firm failures. - Request an assessment of the securities settlement system. - KRX/KSD to better describe settlement completion arrangements assuming clearing member insolvency and keep sufficiency under continuous review. - FSC/FSS/KRX to consider whether current KRX practice for reporting block trades provides sufficient market information. - FSC/FSS/KOFIA to consider further guidance/enforcement on reporting OTC bond trades. - Ongoing monitoring and adaptation of risk management systems for CNS and planned CCP clearing for OTC derivatives trades. ### SECONDARY MARKETS — KRX PRACTICES, TRANSPARENCY, DEFAULT MANAGEMENT - KRX risk-control tools: - Short interest reporting procedures; individual price limits; circuit breakers; power to isolate failures through transfer of positions. - Exchange operates real time trading surveillance; FSS conducts off-site and on-site oversight and reviews trading on a batch basis. - Transparency and reporting gaps: - More information needed on the use of KRX risk-mitigation provisions. - OTC activity may not be readily measurable; enforcement of OTC reporting requirements is difficult to substantiate. - Block trades: block size is very small; price of block trades not reported (only volume); block trades represent less than 1 percent of total trading value. - OTC bond trades: prices to be reported within 15 minutes of execution but enforcement difficult; reporting often related to settlement time. - Events of default and contingency: - Definition of events of default, waterfall of resources and available exchange resources to complete settlement are not clearly described and easily accessible to the public. - KRX performs scenario testing but mitigation and recovery arrangements untested for securities companies. - Period for rectifying a capital deficiency can be longer than best practice. - No documented contingency plan by authorities (see Principle 37). - Key recommended supervisory and market actions (summary): - Document and publicize events of default definitions and default mitigation arrangements. - Document contingency plan for financial disruption and firm failures. - Assess securities settlement system. - Better describe settlement completion arrangements and continuously review sufficiency. - Consider whether block trade reporting and OTC bond trade reporting provide sufficient market information; enhance guidance and enforcement where necessary. - Monitor CNS operation and planned CCP clearing for OTC derivatives; adapt risk management systems to international standards. ### SUPERVISION, INSPECTIONS, ENFORCEMENT METRICS AND TIMELINESS - FSS inspection coverage and cycles: - Financial investment business entities: general examinations every three years for large/medium capital firms; RAMS used monthly for risk scoring. - Collective investment business entities: examination cycle approx six years for AUM ≥ KRW 2.5 trillion and seven years or more for AUM < KRW 2.5 trillion. - CRAs: examined every 3–4 years; audit firms: FSS audit quality review cycle 2–5 years; KICPA review cycle 5–7 years. - On-site examinations 2011–2012 (financial investment business entities): - 2011: General Examination 11; Partial Examination 44; Ordinary Partial Examination 43; Thematic Examination 20; Total 118. - 2012: General Examination 5; Partial Examination 52; Ordinary Partial Examination 29; Thematic Examination 19; Total 105. - Collective investment on-site examinations 2010–2012: - 2010: Total 58 (General 6 for AUM ≥ KRW2.5 Trillion; General 2 for AUM < KRW2.5 Trillion; Partial ordinary 15; Thematic 35). - 2011: Total 53 (6; 2; 10; 35). - 2012: Total 42 (4; 1; 11; 26). - Enforcement and case flow statistics (selected, preserved as in source): - Unfair trading case volumes: - Deferred from previous year: 2012 = 165; 2011 = 152; 2010 = 159 - Newly received: 2012 = 271; 2011 = 222; 2010 = 194 - Closed: 2012 = 243; 2011 = 209; 2010 = 201 - Pending (A+B-C): 2012 = 193; 2011 = 165; 2010 = 152 - Average time from KRX examination/FSS investigation to SFC decision: 382 days. - Public prosecutor’s indictment stage duration: on average 260 to 364 days in past five years. - Probation rates (first trials 2006–2011): - Insider trading: Imprisonment 2 (6.3%); Probation 30 (93.7%) - Market manipulation: Imprisonment 20 (13.4%); Probation 129 (86.6%) - Fraudulent unfair trading: Imprisonment 2 (100%); Probation 0 (0%) - Observations and follow-up: - Enforcement pipeline durations are long; limited regulator access to court outcomes. - FSS established a team to follow up unfair trading referrals; updated case statistics showed a reduction in pending cases (from 247 to 136) and increase in closed cases (from 223 to 334) with 278 indicted of the 334 closed (preliminary data). ### ISSUER DISCLOSURE, ACCOUNTING, AUDIT AND RELATED SANCTIONS - Registration and prospectus requirements: - Investment prospectus filing required on day registration statement becomes effective (Article 123 FSCMA). - Investment prospectus must not contain descriptions different from registration statement; certain items may be omitted for confidentiality with FSC confirmation. - Volume of registration statements and corrections (preserve numeric counts exactly): - Equity securities and others: - 2010: 401 (corrected 112) - 2011: 226 (corrected 63) - 2012: 149 (corrected 52) - Debt securities: - 2010: 1,553 (corrected 7) - 2011: 1,578 (corrected 10) - 2012: 1,267 (corrected 15) - ABS: - 2010: 47; 2011: 45; 2012: 66 - Periodic and material event disclosures: - Annual business reports due within ninety days of year-end (Article 159(1) FSCMA) for stock-listed corporations; half-yearly and quarterly reports due within 45 days (extensions in certain cases). - Material fact report must be submitted to FSC by the day immediately following the event (Article 161 FSCMA). - Filing deadlines and extensions: - Deadline for consolidated financial statements extended to 120 days for corporations with total assets less than KRW 2 trillion and not applying K-IFRS. - Foreign corporations: business report within 120 days and half-yearly/quarterly within 60 days. - Liability and sanctions for disclosure failures (2010–2012 totals preserved): - Material fact report sanctions: 2010: 17, 2011: 22, 2012: 18 - Periodic report sanctions: 2010: 26, 2011: 12, 2012: 19 - Report on new issuances: 2010: 18, 2011: 11, 2012: 13 - Others: 2010: 30, 2011: 3, 2012: 1 - Total: 2010: 91, 2011: 48, 2012: 51 - Accounting and audit regime: - K-IFRS mandatory since 2011 for specified entities. - FSS and KICPA share oversight responsibility for audit reports and auditors; FSS supervises 32 out of 125 audit firms that audit about 85-90 percent of stock-listed corporations. - KSAs updated and to be aligned with revised ISAs from January 1, 2014. - Enforcement statistics on accounting standards breaches (2010–2012 totals preserved): - Total sanctions for accounting non-compliance: 2010: 214; 2011: 139; 2012: 147 - Auditor oversight and independence: - CPA and audit firm registration, independence thresholds and rotation rules preserved as in source (e.g., financial interest thresholds KRW 30 million for CPAs, KRW 100 million for audit firm). - Audit quality review cycles differ by firm size; small audit firms inspected every three to five years. - Principle assessments: Principles 19–21 — Broadly Implemented with recommendations to strengthen oversight of small auditors and enforcement powers. ### COLLECTIVE INVESTMENT SCHEMES (CIS) — FORMS, AUTHORISATION, VALUATION, SUPERVISION - Legal forms and authorization: - CIS legal forms enumerated (trusts, investment companies, limited liability companies, limited partnerships, associations, undisclosed associations, private equity funds). - Publicly offered CIS typically investment trusts or investment companies. - Authorization requirements include equity capital of at least KRW 1-6 billion, feasible business plan, human resources, fit and proper executives, and conflict prevention systems. - AUM and fund distribution (as of March 2013 and end-2012): - Total AUM (end-2012): 307,592 (KRW billion). - Hedge fund AUM (end-2012): KRW 1,739 billion. - Fund distribution by aggregate AUM (Trillion KRW) as of March 2013: - Over 10: No. of firms 10, Aggregate AUM 193.9, Share (%) 58.5 - Over 5: No. of firms 7, Aggregate AUM 48.1, Share (%) 14.6 - Over 1: No. of firms 32, Aggregate AUM 79.0, Share (%) 24.0 - Below 1: No. of firms 36, Aggregate AUM 8.8, Share (%) 2.7 - Total: 85 firms, Aggregate AUM 329.8, Share (%) 100.0 - Disclosure and valuation: - Initial and ongoing disclosure requirements comprehensive (registration statements, periodic reports, ad hoc disclosures). - Valuation rules (Article 238 FSCMA): market price required; if no market price, fair value per Enforcement Decree. Money market funds may be valued at book value with monitoring if book/market differential exceeds 50 basis points; weighted maturity of money market fund assets at most 90 days, planned to be reduced to 60 days. - Pricing error thresholds requiring public correction: - Equity securities traded in domestic market: 0.2 percent; - Equity securities traded in foreign market: 0.3 percent; - Money market funds: 0.05 percent; - Other CIS: 0.1 percent. - FSS: between May 11, 2011 and June 14, 2013, FSC was informed of seven cases where CIS entities compensated investors voluntarily. - Recommendation: introduce compulsory obligation to compensate investors for subscription/redemption at wrong price. - Custody and segregation: - CIS assets must be segregated; related party custody is forbidden in FSCMA but evidence of effective monitoring and enforcement was insufficient. - Trust business entities must separate collective investment property from proprietary and other third-party property; Article 246(2) prohibits trust business entity being affiliate of CIS entity but mission found some FSS staff unaware and examination manual lacking explicit reference. - Supervision and coverage: - As of 2010–2012, 21 of 85 collective investment business entities were subject to a general examination. - FSS does not conduct custody-focused examinations of trust business entities specifically; custody issues examined as part of general bank examinations. - Assessment for CIS supervision: Broadly Implemented with recommendation for targeted examinations of custodians and small CIS operators. ### KEY STATISTICS AND BUDGET/STAFFING METRICS (preserved exactly) - FSS Budget (USD) (values converted using KRW 1,111/USD 1): - 2013 Total: 259,146,715 - 2012 Total: 249,061,206 - 2011 Total: 232,826,283 - Contribution from regulated financial institutions: 2013 = 178,267,327; 2012 = 177,545,455; 2011 = 168,081,908 - Contribution from the BOK: 2013 = 9,000,900; 2012 = 9,000,900; 2011 = 9,000,900 - Fees for securities issuance: 2013 = 71,280,828; 2012 = 61,975,698; 2011 = 55,157,516 - Others: 2013 = 597,660; 2012 = 539,154; 2011 = 585,959 - FSS staff dedicated to securities functions: 404 out of 1700 by task: - Licensing and supervision of securities companies: 79 - Examination of securities companies: 80 - Investigations into possible violations / enforcement actions: 88 - Corporate disclosure: 77 - Accounting and auditing standards / audit engagement review: 80 - KRX staffing: - KRX: more than 600 staff; 121 dedicated to member supervision and market surveillance; 100 responsible for listing and disclosure review. - Record-keeping retention periods (preserve numeric retention periods exactly): - Trading/order records: ten years; - Management of investors' property (collective/discretionary/trust): ten years; - Records of property deposited/withdrawn by investors: five years; - Records of safekeeping of property deposited: five years; - Records of each investor’s orders: ten years; - Records of each investor’s transactions: ten years. ### PRINCIPLE RATINGS (excerpt of assessments preserved) - Principle 2: Partly Implemented. - Principle 3: Broadly Implemented. - Principle 4: Fully Implemented. - Principle 5: Broadly Implemented. - Principle 6: Broadly Implemented. - Principle 7: Broadly Implemented. - Principle 8: Fully Implemented. - Principle 9: Fully Implemented. - Principle 10: Fully Implemented. - Principle 11: Broadly Implemented. - Principle 12: Partly Implemented. - Principles 13–15: Fully Implemented. - Principles 16–37: Mixed ratings across chapters (see related sections above for specifics). *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf* ### INTRODUCTION __________________________________________________________________________________ 7 ### _cr14309 - INTRODUCTION __________________________________________________________________________________ 7 ### SUMMARY - The current securities regulatory framework in Korea achieves good overall compliance with the International Organization of Securities Commissions (IOSCO) Principles. - Legal impediments to international cooperation and exchange of information have been removed. - Since 2011, Korea applies the Korean International Financial Reporting Standards (K-IFRS) that follow the International Financial Reporting Standards (IFRS). - The regulatory structure is complex and can obscure transparency of decision-making; responsibility for supervisory or enforcement action can lie with the Financial Services Commission (FSC), Securities and Futures Commission (SFC), or Financial Supervisory Service (FSS), and it is not always clear which is ultimately in charge. - Pre-deliberation committees at various levels further complicate processes; publication of additional information on decision-making structure and processes is recommended. - Operational cooperation is addressed by agency representation in each others’ decision-making bodies; full participation of the Minister of Strategy and Finance at the FSC Board may risk compromising independence of FSC supervisory and enforcement decisions. - Consideration should be given to mitigating potential undue political influence, for example by restricting the participation of the Minister of Strategy and Finance in supervisory and enforcement decisions. - Ensure arrangements for gathering commercial input provide for equal and transparent treatment of market participants. - Authorities have a broad set of powers, most used effectively; on-site examination program could be expanded to cover smaller entities, particularly asset management companies and auditors. - Improve oversight of small auditors to address auditor independence and quality control compliance challenges. - Continue on-site inspections focusing on proper handling of customer securities and funds. - Challenges remain in enforcing unfair trading/market abuse provisions of the Financial Investment Services and Capital Markets Act (FSCMA) due to insufficiently dissuasive administrative sanctions and lengthy, suboptimal criminal enforcement outcomes. - Authorities should continue to seek improvements in administrative and criminal enforcement powers and processes, jointly with the public prosecutor’s office. - Comprehensive disclosure requirements apply to issuers and collective investment schemes (CIS); authorities are encouraged to monitor whether ongoing disclosure requirements for issuers best serve investors and market evolution while maintaining manageable compliance burdens. - Given investor risks from CIS custody and valuation shortcomings, monitor compliance and require market or fair value for all CIS. - Current processes to monitor systemic risk do not sufficiently acknowledge potential systemic risk arising from the securities sector. - Deficiencies in regulators’ arrangements to manage defaults could negatively impact ability to deal with market disruptions and institutional failures. ### INTRODUCTION - An assessment of implementation of the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) was conducted in the Republic of Korea from April 3 to 19, 2013 as part of the IMF-World Bank Financial Sector Assessment Program (FSAP). - Assessment team: Eija Holttinen, Monetary and Capital Markets Department, IMF, and Andrea Corcoran, external expert for the World Bank. - Previous IOSCO assessment of Korea was conducted in 2001-02 prior to the first IOSCO Assessment Methodology; this assessment is effectively a first assessment under current standards. - Comparisons with prior assessment are discouraged due to changes in methodology. ### INFORMATION AND METHODOLOGY USED FOR ASSESSMENT - Assessment based on IOSCO Principles approved in 2010 and Assessment Methodology adopted in 2011. - Principle 38 was not assessed due to separate standards for securities settlement systems and central counterparties. - Assessors evaluated legal/regulatory framework and implementation in practice, including supervisory and operational practices, inspection programs, cycle, scope, quality of inspections, and follow-up/enforcement actions. - Assessment sources: - Self-assessment and additional written responses prepared by the authorities. - Reviews of relevant legislation and regulations. - Meetings with management and staff of FSC, SFC, FSS, Ministry of Strategy and Finance (MOSF), Bank of Korea (BOK), Seoul Central District Public Prosecutor’s Office. - Meetings with SROs and market participants including KRX, KSD, KOFIA, KICPA, Korean Chamber of Commerce and Industry, banks, securities companies, fund managers, issuers, credit rating agencies, audit firms, and local securities market lawyers. - Assessors acknowledged cooperation of Korean authorities, market participants, FSC and FSS responsiveness, and translators’ assistance. ### INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW #### A. Regulatory Structure - Main agencies established by the Act on the Establishment of the Financial Services Commission (AEFSC): - Financial Services Commission (FSC): sets financial and supervisory policy across all financial institutions and markets in Korea. - Securities and Futures Commission (SFC): established under the FSC; deals with matters related to unfair trading on capital markets and accounting and auditing. - Financial Supervisory Service (FSS): conducts supervision, inspection and investigation of financial institutions under guidance and supervision of the FSC or SFC. - Other significant actors: Ministry of Strategy and Finance (MOSF), Bank of Korea (BOK) and its Monetary Policy Committee (MPC), Korea Deposit Insurance Corporation (KDIC), Fair Trade Commission (FTC). - Overall supervisory model: integrated regulator/supervisor with internal functional diversification; FSS executes supervision of all financial institutions from separate departments. - FSC functions like a Board with Secretariat and staff for policy issuance and supervision; SFC and FSS have prescribed roles operationally. - Staffing and budgets: - FSC: governmental agency, Ministerial/Cabinet level, 287 staff, about 20 in Capital Markets Bureau. - FSS: publicly chartered private corporation, Executive Director/CEO (FSS Governor), approximately 1750 employees, about 23 percent (404) dedicated to capital markets issues; independent budget funded through statutorily permitted fees and constant contribution of the BOK. - SFC: within the FSC, has separate Board but no staff or secretariat; relies on FSC staff as needed. - Multiple interlocking governance and coordination arrangements: - Vice Chairperson of FSC serves as chairperson of SFC. - Governor of FSS serves on the board of the FSC. - Vice Minister of MOSF, President of KDIC and Deputy Governor of BOK are by law ex-officio commissioners of the FSC with full voting rights, including on supervisory and sanctioning decisions. - Vice Chair of FSC, Vice Minister of MOSF and Vice Governor of BOK are members of the KDIC Deposit Insurance Committee. - Table 1 (Governance Arrangement) indicates cross-membership among MOSF, BOK, FSC, FSS, SFC, KDIC, and other bodies. #### B. Market Structure - Korea Exchange (KRX) consolidated three markets in 2005: Korea Stock Exchange (securities), KOSDAQ Stock Market (smaller cap securities), Korea Futures Exchange (KOFEX). - KRX acts as central counterparty (CCP) for exchange-traded securities and futures markets. - Korea Securities Depository (KSD) is the central securities depository. - KRX has links with Chicago Mercantile Exchange (CME) and Eurex for night trading of futures and options. - Market scale and characteristics: - KRX listings: 1,788 listings. - Market Capitalization: USD 1,179.4 billion. - KOSPI 200 futures daily turnover: 7.4 million contracts (world’s most traded futures contract). - Market participation: more than 60 percent of trading originates with retail investors and another 20 percent from foreign investors; little institutional participation. - KRX announced (June 2013) addition of Korea New Exchange (KONEX) specializing in small and medium enterprises. - Table 2. Korea Exchange Equity and Bond Business (preserve numeric values exactly): - Number of Listed Companies: 2009: 1,788; 2010: 1,798; 2011: 1,816; 2012: 1,784 - Market Capitalization, USD Billions: 2009: 834.6; 2010: 1,091.9; 2011: 996.1; 2012: 1,179.4 - Market Capitalization, KRW Trillions: 2009: 971.9; 2010: 1,239.2; 2011: 1,147.6; 2012: 1,262.7 - Value of Bond Trading, USD Billions: 2009: 438.1; 2010: 515.6; 2011: 716.0; 2012: 1,285.6 - Source: World Federation of Exchanges - A small platform under KOFIA provides quotations for companies not listed on KRX with market capitalization of USD 554 million and annual trading value of USD 24 million. - KOFIA is an SRO with statutory functions including certification of securities professionals and pre-clearance of advertisements; membership not mandatory but effectively required to operate in financial services. - ATS/MTF were not permitted at time of on-site visit; law recently changed. - March 2013 bill contemplates creation of a CCP for OTC derivatives clearing; plan is for infrastructure to operate under KRX auspices. - Bonds trade OTC and on the exchange. ### PRECONDITIONS FOR EFFECTIVE SECURITIES REGULATION - Multiple laws govern capital markets regulation and supervision, including (listed as in source): - AEFSC and related Enforcement Decree; - FSCMA and related Enforcement Decree; - Act on the External Audit of Stock Companies and related Enforcement Decree; - Certified Public Accountant Act (CPA Act) and related Enforcement Decree; - Use and Protection of Credit Information Act and related Enforcement Decree; - Act on Real Name Financial Transactions and Confidentiality and related Enforcement Decree; - Administrative Procedure Act (APA); - Framework Act on Administrative Regulations; - Commercial Act; - Government Organization Act (GOA); - Act on Debt Rehabilitation and Bankruptcy; - Act on the Structural Improvement of the Financial Industry. ### MAIN FINDINGS AND RECOMMENDATIONS (HIGHLIGHTS) - Governance and independence: - Complexity and interlocking governance can obscure decision-making responsibility and may permit undue political influence via ex-officio commissioners with full voting rights. - Recommendation: Consider restricting participation of the Minister of Strategy and Finance (and related ex-officio roles) in supervisory and enforcement decisions to mitigate undue influence. - Transparency and stakeholder input: - Publication of additional information on decision-making structure and processes would be beneficial. - Ensure commercial input arrangements treat market participants equally and transparently. - Supervision and inspections: - Expand on-site examination program to ensure coverage of smaller entities, especially asset managers and auditors. - Continue focus on proper handling of customer securities and funds. - Audit oversight: - Improve oversight of small auditors to address enforcement of auditor independence and quality control. - Enforcement of market abuse: - Current administrative sanctions not sufficiently dissuasive; criminal enforcement process lengthy and with less than optimal outcomes. - Jointly with public prosecutor’s office, seek ways to improve administrative and criminal enforcement powers and processes. - Disclosure and CIS: - Maintain comprehensive disclosure regimes for issuers and CIS; monitor ongoing disclosure requirements to balance investor protection and compliance burden. - Require market or fair value accounting for all CIS and monitor custody and valuation practices. - Systemic risk and default management: - Existing systemic risk monitoring does not sufficiently account for securities sector risks. - Deficiencies in default management arrangements could impair response to market disruptions and institutional failures. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf* ### 13. The number of authorized and registered financial investment business entities and ### 13. The number of authorized and registered financial investment business entities and ### Authorized and registered entities (as of March 31, 2013) - The number of authorized and registered financial investment business entities and the banks and insurance companies conducting financial investment business activities were reported as of March 31, 2013. - Table 3. Financial Investment Business — Source: FSS. (* As of July 2013. **Offshore investment advisors only.) - (Tabular counts are presented in the source table.) ### Assets under management (AUM) — end-2012 - The assets under management (AUM) in the domestic collective investment schemes totaled KRW 307,592 billion at the end 2012. - The funds are primarily investment trusts, with a small proportion being investment companies. - The hedge fund industry in Korea had AUM of KRW 1,739 billion as of end-2012. - Private offerings are commonly made. ### Assets Under Management in Domestic Collective Investment Schemes — key totals (Table 4) - Total AUM (Sum): 307,592 (unit: KRW billion) - Total Investment Trust (Sum): 296,605 (unit: KRW billion) - Total Investment Company (Sum): 10,987 (unit: KRW billion) - Total AUM by category (selected): - Public Offering Investment Trust Sum: 181,209 (unit: KRW billion) - Private Placement Investment Trust Sum: 115,395 (unit: KRW billion) - Total Sum (Public + Private): 296,605 (Investment Trust) + 10,987 (Investment Company) = 307,592 (Sum) ### Preconditions for effective securities regulation - Korea is a civil law jurisdiction with financial services legislation drawn from multiple models including the United Kingdom, the United States, the European Union and others. - The law is highly detailed and comprises thousands of pages of text. - Korea has an independent judiciary; prosecutors are officers of the courts. - Korea has benchmarked its financial sector framework against international standards and implemented international accounting and auditing standards. - Insolvency law supports finality of settlement, protection of customer funds held by securities brokers, and close out netting procedures. - Commercial law has been updated to be more consistent with Anglo Saxon corporate governance structures and to permit governmental agencies implementing capital markets law some scope to interpret primary legislation. - Residual legal issues remain relative to the integrity of pledged collateral in indirect holding systems. - Deposit protection scheme and resolution arrangements are extended to all financial institutions covered by the financial supervisory architecture, including investment brokers and traders. - The system uses self-regulatory organizations (SROs) that are empowered by statutes and receive delegations of various regulatory functions. - The judicial system is observed to be fair, although prosecutorial resources available for combating financial crime are limited. ### Main findings — supervisory, enforcement, disclosure, and market infrastructure - Principles for the regulator: - Regulatory structure intends an integrated approach to supervision while maintaining functional expertise and enhancing securities regulator capacity to issue binding guidance. - Operational structure and procedural allocation of responsibilities are complex; individual mandates seem unclear and the overall system lacks operational transparency. - Interlocking governance structures, including voting participation of the Minister of Strategy and Finance in supervisory and enforcement decisions, can be perceived to compromise independence. - The SFC does not have its own staff, which may impede maximizing use of existing resources. - Recommend continued efforts to refine cooperative protocols among domestic authorities. - Procedures for consultation could be improved by providing a feedback statement and increasing transparency of the Regulatory Reform Committee’s (RRC) decision-making processes. - Communication of restrictions on personal trading and monitoring for compliance should be enhanced. - Cross-agency arrangements exist for identifying and mitigating potential systemic risks, but risks from the capital markets may be underweighted. - Process for assessing perimeter risks is not documented. - Prevention of conflicts of interest and misaligned incentives has been addressed in the regulatory framework. - Principles for self-regulation: - SROs augment front-line oversight of markets and market professionals. - FSC/FSS has a comprehensive program to oversee statutory SROs, including approval of rules and processes, receipt of notifications of SRO activities, on-site and off-site reviews, and oversight of sanctions and dispute resolution results. - Principles for enforcement: - The FSS, together with SROs, has sufficient inspection, investigation and surveillance powers vis-à-vis regulated entities. - On-site examination program is largely based on periodic and thematic examinations with some risk-based elements; limited examinations of certain smaller regulated entities remain a gap. - FSS, FSC and SFC have broad investigative powers that are not fully utilized, leading to reliance on the public prosecutor’s office after referral by SFC or FSC. - Authorities can impose a range of administrative sanctions, but power to impose pecuniary administrative sanctions is limited to certain violations; maximum amounts for civil money penalties and administrative fines are low. - The enforcement process appears to take a relatively long time; criminal process has not necessarily led to credible use of the full range of sanctions. - Principles for cooperation: - FSC and FSS have sufficient authority to share information with domestic and foreign counterparts without external approvals. - They are signatories to the IOSCO MMoU, several bilateral MoUs, and a domestic MMoU on macroprudential cooperation and exchange of financial information. - In practice they have provided timely assistance to numerous requests for assistance. - Principles for issuers: - Regulatory framework includes comprehensive and timely primary market, periodic and material event disclosure requirements for issuers of listed and publicly offered securities. - Acquisitions of large shareholdings are required to be disclosed. - Obligation to make a public tender offer and prepare a public tender statement and prospectus applies to those that intend to acquire at least 5 percent of the equity securities of a company. - All listed corporations are required to prepare financial statements according to the K-IFRS that are fully in line with the IFRS and attach them to registration statements and annual business reports. - KAI/KASB set and interpret K-IFRS; compliance supervised by FSS and KICPA; enforcement by FSS, KICPA, SFC or FSC in more serious cases. - Principles for auditors, CRAs and information service providers: - FSS and KICPA share oversight responsibility for audit reports and auditors; oversight includes sampling of audit reports and periodic on-site visits. - Non-compliance by audit firms remains a challenge; a legislative proposal aims to strengthen quality control requirements for audit firms of listed companies and financial institutions. - KSAs will be fully aligned with the revised ISAs in the beginning of 2014. - Credit rating agencies are required to be authorized and are subject to regular on-site examinations and periodic reporting; IOSCO CRA Code of Conduct requirements have been fully implemented. - FSC rules prevent conflicts of interest by sell-side analysts and apply oversight to all types of evaluators in the manner of CRAs. - Pricing by bond pricing agencies should be kept under review as guidance on benchmarks for pricing evolves. - Principles for collective investment schemes (CIS): - CIS can be provided in various legal forms; publicly offered funds are typically investment trusts or investment companies. - All CIS operators and those that market or distribute CIS must be authorized and are subject to conduct of business, organizational and reporting requirements. - FSS on-site examination program does not provide sufficient coverage of small CIS operators; custodians are subject to limited examinations regarding their CIS custodian role. - CIS assets must be properly segregated; related party custody is forbidden in the FSCMA, but evidence on effective monitoring and enforcement of this prohibition was insufficient. - Investors must be provided with an investment prospectus analogous to the registration statement reviewed by FSS. - Requirements on advertising, periodic reporting, disclosure of investment strategy, valuation of CIS assets, subscription and redemption are largely appropriate. - Money market fund assets are valued at book value. - Pricing errors above a certain level must be disclosed, but investor compensation for errors is based on market practice rather than an obligation. - Hedge funds can be offered only as private placements to qualified investors; operating a hedge fund requires the same authorization as a regular CIS. - Hedge funds are exempted from the FSCMA audit requirements, and the FSS has not yet conducted any on-site examinations on them. - Principles for market intermediaries: - Comprehensive licensing rules include vetting principals, including major shareholders. - Ongoing supervision uses detailed examination guides combining compliance and risk-based regimes and early warning reporting. - Recommend further documentation of contingency arrangements and supervisory models that give more weight to intra-group exposures. - Care should be taken that forbearance with capital requirement compliance does not lead to accrual of unmanageable risks. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf* ### 24. Principles for secondary markets: The KRX is a participant utility with a monopoly in ### _cr14309 - 24. Principles for secondary markets: The KRX is a participant utility with a monopoly in ### KRX market structure and risk-control tools - The KRX is a participant utility with a monopoly in exchange trading. - The exchange has multiple programs to control risk, including: - short interest reporting procedures, - individual price limits, - circuit breakers, - the power to isolate failures through the transfer of positions. - The exchange plays an active front line role in oversight with real time surveillance and active surveillance staff. ### Transparency, reporting and measurement gaps - Disclosure of more information on the use of the KRX risk-mitigation provisions would be useful. - According to the authorities, OTC activity is limited and is subject to reporting consistent with international standards. - However: - the actual amount [of OTC activity] may not be readily measurable, - the level of enforcement of reporting requirements is difficult to substantiate. - More information on the delineation of events of default and corresponding resources for completing settlement should be readily available to the market at large as well as to clearing participants. - International benchmarks with respect to pre- and post-trade transparency of various transaction types and valuation of illiquid securities by pricing agencies should be kept under review. ### Surveillance, oversight and supervisory roles - The primary responsibility for market surveillance lies with the KRX; the FSS conducts off-site and on-site oversight and reviews trading on a batch, not a real time basis. - The exchange operates its own real time trading surveillance program and undertakes real time trade monitoring; exchange staff conduct yearly inspections of members with respect to trading practices. - The exchange can bring its own actions against members and request suspension of offending employees; the KRX has taken disciplinary actions in a significant number of cases but does not make its actions systemically public. - The KRX has referred unfair trading cases to the FSS for further investigation; the majority of market abuse actions by the public prosecutor’s office originate from KRX referrals. ### Events of default, settlement completion and systemic risk management - The exchange has a broad range of requirements and arrangements to mitigate and manage default risk, market disruption, and futures, short, and other open exposures. - Deficiencies and information gaps include: - the definition of events of default, the waterfall of resources to redress them, and the resources accessible to the exchange to complete settlement are not clearly described and easily accessible to the public; - while the KRX performs scenario testing, it is not clear how existing mitigation and recovery arrangements will be applied in practice as they have yet to be tested with respect to securities companies. - The period for rectifying a capital deficiency can be longer than is consistent with best practice. - The authorities do not have a documented contingency plan (see also Principle 37). - The impact of the recent introduction of continuous net settlement (CNS) may achieve improvements in certainty, but the CNS and the expected introduction of CCP clearing for OTC derivatives trades will require careful ongoing monitoring and adaptation of risk management systems to meet international standards. ### Pre- and post-trade transparency, OTC reporting and valuation - The KRX system provides largely sufficient pre-and post-trade information. - Block trades: - Minimum block size and the use of volume weighted average prices for block trades are specified by rules. - The block size is very small, and only the volume of block trades and not the price is reported. - Since the value of block trades is less than 1 percent of the total trading value and there is a pricing model, the impact on transparency is limited. - OTC bond trades: - Prices for OTC bond trades are to be reported within 15 minutes of execution, but enforcement is difficult as trades are typically done by voice or messenger and reporting is related to time of settlement. - For bond trades to be settled, prices must be reported as all bonds are dematerialized. - Valuation of illiquid securities by pricing agencies and international benchmarks for pre- and post-trade transparency should be kept under review. ### Relevant IOSCO Principles—grades and salient findings (selected) - Principle 9: FI — The KRX is currently effectively a monopoly for profit mutual company. Access to trading must be through an authorized broker. - Principle 10: FI — The FSS has sufficient inspection, investigation and surveillance powers; the primary responsibility for market surveillance lies with the KRX. - Principle 11: BI — The FSS, SFC and FSC jointly have a broad set of investigative powers that are currently not fully utilized; maximum amounts for civil money penalties and administrative fines are low. - Principle 31: BI — Required risk management, internal control and compliance functions exist, but the KRX is not able to monitor settlement positions of individual customers in indirect holding systems. - Principle 32: BI — Authorities have intervention powers and requirements for settlement guarantee and compensation funds, but information on events of default and resources for redress are not readily available; no documented contingency plan. - Principle 35: FI — The KRX provides largely sufficient pre- and post-trade information; block trades reporting may be insufficient; KOFIA Freeboard contains significant information. - Principle 36: FI — Exchange rules prevent various manipulative practices; KRX disciplinary actions are not systemically public. - Principle 37: BI — Exchange has broad requirements to mitigate default risk, but the definition of events of default and waterfall of resources is not clearly described and accessible; mitigation and recovery arrangements are untested for securities companies. - Principle 33 and Principle 34: FI — The KRX was established by merging exchanges; requirements for establishment and oversight are consistent with IOSCO requisites; the FSS conducts oversight and reviews trading on a batch basis while the exchange operates real time surveillance. ### Key recommended actions (summary from Table 6 related to secondary markets) - Document and make readily available to participants and the public: - the definition of events of default, - existing default mitigation arrangements, - the order by which available resources to redress defaults will be used by the financial investment business entity, the KRX, the KSD and any future CCP. - Document a contingency plan for addressing financial disruption and firm failures. - Request an assessment of the securities settlement system. - The KRX and KSD should better describe arrangements for the completion of settlement in the event of default, even assuming the insolvency of a clearing member, and keep the sufficiency of these arrangements under continuous review. - The FSC, FSS and KRX should consider whether the current KRX practice for reporting block trades provides sufficient information to the market. - The FSC, FSS and KOFIA should consider whether further guidance (and enforcement) is necessary with respect to reporting OTC bond trades. - Ongoing monitoring and adaptation of risk management systems for CNS and planned CCP clearing for OTC derivatives trades. *Source: _cr14309 - 24. Principles for secondary markets: The KRX is a participant utility with a monopoly in (IMF country report content).* ### 25. The Korean authorities would first like to thank the IMF and the World Bank for their ### _cr14309 - 25. The Korean authorities would first like to thank the IMF and the World Bank for their ### Overall response to the assessment - The Korean authorities thank the IMF and the World Bank for their work on the assessment of Korea’s securities regulation and welcome the recommendations and suggestions made by the assessment team. - The authorities identify areas of disagreement in the assessment report and provide further comments. ### Principle 2 — Governance and independence of the Financial Services Commission (FSC) - The report suggests that the Ministry of Strategy and Finance’s participation in the FSC may weaken independence of the regulatory authority. - The Korean authorities’ position: - The Commission is a representative system comprising 9 commissioners representing relevant organizations as well as experts, which makes it difficult to make decisions in favor of any one of the 9 commissioners. - Rules governing the Commission stipulate that any commissioner shall be excluded or may file application for challenge or withdraw from resolution and deliberation on matters in which he/she has either direct or indirect interests to ensure fair resolution and deliberation. ### Principle 12 — Inspection, investigation, surveillance, enforcement, and compliance - The assessment report indicates the on-site examination program is relatively robust except for: - Smaller collective investment business entities, and - Audit firms/teams, which are subject to less frequent examinations. - The Korean authorities emphasize the need for sufficient time to ensure sound quality of investigation and enforcement while noting efforts to expedite processes to minimize consumer complaints and investor harm. ### Institutional coordination and enforcement innovations - Joint task force: - The FSC, the Financial Supervisory Service (FSS) and the prosecutors’ office have been working together in a joint task force since May 2013 to fast-track the criminal enforcement process. - Civil money penalties: - The FSC is consulting with the Ministry of Justice to introduce civil money penalty in punishment of unfair trading cases, including market abuse, to recover unlawful gains and allow timely punishment. - The recently revised Financial Services and Capital Markets Act (FSCMA) introduces civil money penalty to punish violations of requirements to disclose large holdings of securities. - The revised FSCMA also introduces fines ranging from 100 percent up to 300 percent of the amount of unlawful gains from unfair trading to discourage unlawful activities and recover ill-gotten gains more effectively. - FSS dedicated team and information sharing: - In August 2013, the FSS launched a team dedicated to the management of unfair trading cases to enhance investigation and enforcement quality. - The team follows up and collects information on indictment and conviction rates of unfair trading cases referred by the FSS to the prosecutors’ office. - The FSC, the FSS, and the prosecutors’ office have set up a permanent consultative body for information exchange. ### On-site examinations and resources for smaller asset management firms - Examiner staffing and targeting: - The FSS increased the number of examiners for on-site examinations by 55 percent in 2013 compared to 2012. - The FSS selects timely and emerging issues for on-site visits, such as partial examinations of newly established asset management firms. - For 2014, exam frequency and other wide-ranging factors will be considered in annual examination plans. - Small asset management firms never subject to on-site examinations since inception will be subject to partial examinations in the first quarter of 2014 with special focus on areas and issues identified as deficient during full-scope examinations of large asset management firms. ### Inspection of audit firms and supervisory risk allocation - Supervisory risk view: - The FSS considers supervisory risk associated with small audit firms to be small because of their small size and relatively small impact on the overall financial market. - To achieve efficient supervision with limited resources, the FSS allocates more supervisory resources to inspection of large accounting firms with greater significance for investor protection. - Audit coverage statistics and responsibilities (as stated): - Audit teams together audit 15 percent of all companies subject to external audits and the quality of audit conducted by audit teams is inspected by the KICPA. - Only 14 percent of total listed firms are audited by small audit firms and the quality of audit performed by small audit firms are also inspected by the KICPA. - Mid and large audit firms audit 86 percent of listed companies and thus warrant the most supervisory resources. - Audit quality inspection for mid- and large audit firms are directly conducted by the FSS. ### Purpose of the assessment - The assessment aims to ascertain whether: - The legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. - The assessment is intended to: - Identify potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary. - Serve as a basis for establishing priorities for improvements to the current regulatory scheme. *Source: _cr14309 - 25. The Korean authorities would first like to thank the IMF and the World Bank for their* ### 35. The assessment of the country’s observance of each individual Principle is made by ### _cr14309 - 35. The assessment of the country’s observance of each individual Principle is made by ### Assessment methodology and categories - Assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, not applicable. - IOSCO assessment methodology provides assessment criteria and designated benchmarks; recognizes implementation may vary by domestic context, structure, and stage of development. - Exact category definitions as provided: - Fully implemented: "when all assessment criteria specified for that Principle are generally met without any significant deficiencies." - Broadly implemented: "when the exceptions to meeting the assessment criteria specified for that Principle are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation that the Principle is intended to address." - Partly implemented: "when the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies." - Not implemented: "when major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria specified for that Principle." - Not applicable: "when it does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations." ### Allocation of regulatory responsibilities — key authorities (findings) - Key financial regulatory and supervisory authorities in Korea: - FSC at http://www.fsc.go.kr/eng - FSS at http://english.fss.or.kr/fss/en/main.jsp - SFC (a Board of five members located within FSC, does not have its own staff or website) - BOK at http://eng.bok.or.kr/eng/engMain.action - KDIC at www.kdic.or.kr/english/index.jsp - FTC at http://eng.ftc.go.kr/ - MOSF at http://english.mosf.go.kr/ - Financial Intelligence Unit is located within the FSC. - Extensive use of SROs with statutorily mandated functions, delegated responsibilities, and contractual duties. ### Self-Regulatory Organizations (SROs) (findings) - Self-regulatory functions primarily consolidated in KRX and KOFIA: - Oversee exchange markets for all products and OTC markets for “unlisted” equities and bonds. - Enforce compliance by members with SRO rules and provide data, education, and other services. - KRX and KOFIA have private rulemaking authority subject to FSC approval. - KSD also has private rulemaking authority subject to FSC approval. - KRX decides to list securities or admit them to trading; FSS must approve prospectuses under delegation from the FSC. - SROs run dispute resolution forums; KOFIA certifies individual professionals. ### Financial Supervisory Service (FSS) (findings) - FSS is a non-governmental entity vested with ongoing supervision and inspection/examination/surveillance for financial investment business and securities issues. - Staffing and organisation: - Professional staff of approximately 1750 persons (exceeds that of the FSC by 300 percent). - 31 departments. - Four regional offices. - Three district offices. - Four overseas representative offices in New York, London, Beijing and Tokyo. - AEFSC statute charters the FSS as a private “non-capital special corporation”; funded primarily by fees from regulated participants (AEFSC, Article 24(2)). - FSS accountable to the FSC (AEFSC Article 24; Article 18). ### Financial Services Commission (FSC) (findings) - FSC is a “central administrative agency” established under Article 2 of the GOA — nine member board and related Secretariat. - Appointment and governance: - FSC Chairman appointed by the President on recommendation of the Prime Minister for a fixed term of three years, extendable once; Chairman must undergo personnel hearings before the National Assembly (AEFSC Article 4(2)). - Vice Chairman appointed for a similar term on recommendation of the FSC Chairman. - Vice Minister of MOSF, President of KDIC, Deputy Governor of BOK and Governor of FSS are ex officio commissioners. - FSC commissioners also include two financial experts recommended by the FSC Chair and one industry representative recommended by the Chair of the Korea Chamber of Commerce. - FSC responsibilities (Article 17 AEFSC) include: - Development of policies and systems related to finance; - Supervision, inspection, and sanctioning of financial institutions; - Authorization of establishment, merger, conversion, acquisition and transfer of business of financial institutions; - Management, supervision and monitoring of capital markets; - Creation and development of a financial hub; - Enactment, amendment and repeal of Acts, subordinate statutes and regulations regarding the foregoing; - Bilateral and multilateral negotiations and international cooperation over financial institutions and foreign exchange; - Supervision of soundness of institutions handling foreign exchange. - Note: a footnote clarifies "Management under the relevant law should be read to mean 'oversight.'" ### Securities and Futures Commission (SFC) (findings) - SFC is a governmental entity within FSC with an independent mandate and five-member Board but relies on FSC staffing and FSS to undertake supervisory activities; does not have its own staff, Secretariat, or independently approved budget. - SFC chaired by the Vice Chairman of the FSC; four remaining commissioners appointed by the President on recommendation of the Chair of the FSC. - Commissioner qualifications include relevant government financial sector experience at the Senior Civil Service level or at least 15 years academic experience at the level of an associate professor or at a research institute. - SFC competences (Article 19 AEFSC) include: - Investigation of unfair trade in the capital market; - Accounting and auditing standards and oversight; - Preliminary deliberation on important matters relating to the management, supervision, and monitoring of capital markets within the FSC; - Matters delegated by the FSC related to management, supervision and monitoring of capital markets. - SFC may partially or entirely revoke or suspend a disposition made by the FSS with regard to any matter specified in Article 19 if that disposition “is illegal or substantially inappropriate” (Article 61). ### Bank of Korea (BOK) (findings) - BOK is the central bank with a financial stability mandate under the Bank of Korea Act and related Enforcement Decree. - BOK does not conduct day-to-day supervision of banks, but can: - Require the FSS to examine banking institutions at its request; - Include BOK personnel in inspection/investigation teams; - Reconsider an FSS supervisory decision if it would affect monetary and credit policies (AEFSC, Article 62). - FSS must comply within one month with a BOK inspection request (Enforcement Decree of the AEFSC Article 22-3). ### Interlocking governance and evolution (findings) - Interlocking arrangements: Vice Chair of FSC chairs SFC; Governor of FSS sits on FSC board; Vice Minister of MOSF, President of KDIC and Deputy Governor of BOK are FSC commissioners. - Structure evolved from multi-step consolidation beginning in 1998, with refinements in 2004 and 2008. - Historic vestiges persist (e.g., MOSF retains ex officio seat on FSC Board); SFC retains special capital markets mandate; FTC handles anticompetitive conduct. ### Powers of interpretation, principal laws, and hierarchy (findings) - Framework Act of Administrative Regulations: “No administrative agencies may limit the rights of citizens or impose duties on citizens pursuant to regulations that are not based on Acts.” - FSC and SFC may partially delegate to the Governor of the FSS either’s authority under the AEFSC or any other Act or subordinate statute (Article 71 AEFSC). - APA requires an administrative agency to provide an interpretation or clarification upon request (Article 5) and requires interpretations of general applicability to be made public (Article 51). - Principal laws relevant to securities: AEFSC, FSCMA and related Enforcement Decree, Commercial Act, APA, Depositor Protection Act, Act on the Structural Improvement of the Financial Industry, Act on Rehabilitation and Bankruptcy, CPA Act, Act on External Audit of Stock Companies, Use and Protection of Credit Information Act, and others. - Hierarchy of law: Acts of Parliament; Enforcement Decrees (typically Presidential Decrees); Ordinances of the Prime Minister or other Ministers; Regulations (may be adopted by the FSC); Detailed Regulations (may be adopted by the FSS); informal, non-binding guidance. ### Gaps, duplication, and practical issues (findings) - Law intended to provide uniform coverage but is complex; described by a member of the public as “prescriptive ambiguity.” - Potential gaps and evasions: - Schemes designed to evade securities law via trusts or deposits. - Banks and insurance companies observe governance requirements for their categories; some insurance products linked to securities may not be securities. - Area described as “concurrent business”; bank branches are an important distribution channel for collective investment schemes. - Supervisory responsibility for particular institutions (e.g., newly permitted CCP) not fully articulated. - Ultimate responsibility for effectuation of macro-prudential policies not fully articulated. ### Requirement to cooperate, information sharing and MoU (findings) - Law permits authorities to share oversight via FSC board participation, joint inspections, and data access; permits certain inter-authority requests and requires compliance. - Examples of legal cooperation provisions: - FSS must examine institutions at direction of BOK (Bank of Korea Act Articles 87-89 and AEFSC Article 65). - FSC may request cooperation of related agencies and “any other institution or organization” for inspections, data provision or rectification (Articles 65 and 65-2 AEFSC). - KDIC may request inspection of an insured institution or a financial holding company with that institution as a subsidiary or affiliate; KDIC may share reports and take necessary measures (Article 66). - MOSF, FSC and Monetary Policy Committee of the BOK may request data sharing and agencies must comply except in extenuating circumstances (Article 65 AEFSC). - Governor of the FSS has independent power to request cooperation of any institution (Article 67 AEFSC). - Memorandum of Understanding executed in September 2012 among MOSF, FSC, BOK, FSS and KDIC for information exchange and dispute resolution through the Macroeconomic Financial Meeting (MEFM) headed by the Vice Minister 1 of the MOSF. - MoU provides for a working level group to assemble ad hoc on emerging macro-prudential issues; more specific top-down protocols for cross-sector information sharing have not been explicitly articulated. - SFC must rely on FSS, subject to FSC control over allocation of resources; Article 22 requires SFC rules and organization as prescribed by FSC except where law provides otherwise; Article 61 permits FSC to override SFC and FSS, and SFC may override FSS in matters related to Article 19. *Source: REPUBLIC OF KOREA, _cr14309 - 35. The assessment of the country’s observance of each individual Principle is made by* ### 19. Anecdotally, the Secretariat of the FSC controls the flow of business to the FSC, which would provide ### _cr14309 - 19. Anecdotally, the Secretariat of the FSC controls the flow of business to the FSC, which would provide ### Overview and overall assessments - Assessment summaries appearing in the source: - Principle 1: Assessment not explicitly restated in this excerpt. - Principle 2: Partly Implemented. - Principle 3: Broadly Implemented. - Principle 4: Fully Implemented. - Principle 5: Broadly Implemented. - Principle 6: Broadly Implemented. - Principle 7: Broadly Implemented. - Principle 8: Fully Implemented. - Principle 9: Fully Implemented. - Principle 10: Fully Implemented. - Principle 11: Broadly Implemented. - Principle 12: Partly Implemented. - Principles 13–15: Fully Implemented. - Principle 16: (Disclosure regime described; assessment not restated in excerpt) ### Regulatory structure, independence and accountability (Principle 2) - Structure and roles: - FSC: governmental entity with ultimate licensing authority and ministerial status; Board includes Minister of Strategy and Finance as a voting member. - FSS: conducts day-to-day examinations, surveillance, investigations and certain enforcement functions; accountable to FSC but operates without the broader governmental accountability applicable to norm-issuance. - SFC: special powers for oversight of accounting and auditing and sanctioning of market abuses, subject to FSC oversight. - Key institutional features and concerns: - Minister of Strategy and Finance participates as a voting member of the FSC Board and sits in other high-level fora (e.g., RRC, KCIF). - Ministerial and political participation may have a “chilling effect” on FSS and decision-making; action is often by consensus though a majority can act. - Recommendation in source: consider removing MOSF representative from voting on, and potentially from, supervisory and sanctioning processes; provide FSC more authority to resist RRC recommendations; consider public meetings for normative decisions. - Terms, appointment and dismissal: - AEFSC sets fixed terms for Chairman and Commissioners; bases for removal for cause specified (Article 10 for FSC, Article 32 for SFC). - Practice: Chairman of the FSC resigns upon election of a new President, though legally could continue as Commissioner. - Accountability mechanisms: - RRC: 45 day review period for important regulations (less important may be 10 days); co-headed by Prime Minister and civilian co-chair; 22 members. - FSC must report quarterly to the National Assembly and defend budget annually; National Audit Board conducts budget review. - APA (Articles 22–27) requires reasoned written decisions and opportunity to be heard; Enforcement Review Committee in FSS acts like probable cause committee. ### Powers, resources, staffing and governance (Principle 3) - Powers available across FSC, SFC, FSS (selected list precisely as in source): - Issuance of cautions and warnings; - Suspension of trading; - Restriction of business; - Removal of management; - Requirement of additional equity contributions; - Requirement to correct a financial statement or an offering document; - Rescission of profits in the event of misleading disclosure; - Publication of information on short swing profits by an insider; - Suspension of redemptions; - Transfer of funds or securities; - Imposition of monetary penalties; - Withdrawal, conditioning or revocation of a license; - Delisting; and - Referral for criminal process. - Boards and meetings: - FSC Board active; in 2011 and 2012 both FSC and SFC met regularly twice a month; FSC held 14 ad hoc meetings in 2011 and 3 ad hoc plus seven seriatim resolutions in 2012. - Staff and allocations: - Capital Markets resources: about 10 percent of FSC staff and 23 percent of FSS staff. - FSC: overall staff 287; FSC Capital Markets Bureau ≈ 30 out of 287. - SFC: no separate staff, secretariat, or budget; uses seconded staff. - FSS: total staff 1,700 (1700); about 400 dedicated to capital markets and securities products and professionals. - Within FSS capital markets staffing: 1 Deputy Governor for Capital Markets; Assistant Governors for supervision/disclosure, examination/investigations, and accounting/auditing. - FSS Budget (USD) (values converted using KRW 1,111/USD 1): - 2013 Total: 259,146,715 - 2012 Total: 249,061,206 - 2011 Total: 232,826,283 - Contribution from regulated financial institutions: 2013 = 178,267,327; 2012 = 177,545,455; 2011 = 168,081,908 - Contribution from the BOK: 2013 = 9,000,900; 2012 = 9,000,900; 2011 = 9,000,900 - Fees for securities issuance: 2013 = 71,280,828; 2012 = 61,975,698; 2011 = 55,157,516 - Others: 2013 = 597,660; 2012 = 539,154; 2011 = 585,959 - FSS staff dedicated to securities functions (404 out of 1700) by task: - Licensing and supervision of securities companies: 79 - Examination of securities companies: 80 - Investigations into possible violations / enforcement actions: 88 - Corporate disclosure: 77 - Accounting and auditing standards / audit engagement review: 80 - Other SRO and market infrastructure staffing: - KRX: more than 600 staff; 121 dedicated to member supervision and market surveillance; 100 responsible for listing and disclosure review. - KOFIA: 36 employees in oversight roles. - KSD: oversees settlement process under business rules. - Qualifications and turnover: - FSC staff degrees: Law 20; Economics 90; Finance 1; Business 49; Accounting 26; Other 8. - FSS qualifications: CPA 281; Lawyer 61; Certified Financial Analyst 31; Ph.D. 48; Financial Risk Manager 96; Certified Internal Auditor 10. - Average turnover rate between 2010 and 2012 varied from 0.8 to 4 percent (FSC and FSS aggregate). - Technology and systems: - DART system for electronic filing of registration statements, prospectuses, material event and periodic disclosures. - FSC has access to KRX terminals for real-time trading observation; FSS primarily performs batch surveillance. - 88 staff committed to surveillance and investigation for securities violations and oversight activities. ### Transparency, processes and consultative mechanisms (Principle 4) - Statutory procedural framework: - APA requires pre-publication of proposed legislation and secondary regulations for at least 20 days and permits hearings in certain circumstances (Articles 43–44). - Framework Act on Administrative Regulations requires submission to RRC for regulations affecting >1 million people or costing more than KRW 10 billion (USD 1 million). - Consultation and committees: - FSC has five standing expert committees with 20 percent FSC staff and 80 percent private sector membership; they meet quarterly. - FSS established similar committees in 2012. - Committees include Financial Policy Committee, Service Committee, General Public Committee, Securities Industry Committee, Global Financial Committee. - Licensing and sanction processes: - FSS handbook explains licensing process and criteria; license applications posted on FSC website permitting objections (FSCMA Article 13). - Sanctions deliberation committees include: Committee for Deliberation on Investigations of Capital Markets and Accounting Oversight Deliberative Committee (partially composed of outside experts). - FSS Enforcement Review Committee pre-hears cases before sanctions proposed to FSC. - Transparency strengths and gaps: - Laws, regulations, decrees and guidance must be made public; many materials available on KRX, KSD, KOFIA, FSS and FSC sites, sometimes in English. - DART retains all electronically filed information accessible to general public. - Reports on investigations are not made public; not all sanctions are published. - Assessment: Fully Implemented for clear and consistent regulatory processes; recommendation to increase transparency of RRC deliberations and provide more substantive feedback on consultation outcomes. ### Professional standards, conflicts of interest and confidentiality (Principle 5) - Codes and legal obligations: - State Public Officials Act (Articles 56–66) applies to career and non-career staff: duty of loyalty, impartiality, prohibition on gifts, duty of confidentiality. - AEFSC Article 35: duty of confidentiality for FSS and employees. - Internal Codes of Conduct exist for FSC and FSS; Annex of Detailed Regulations on Investigation of Capital Markets applies to investigators. - Trading and holding restrictions: - FSCMA Article 441: trading limitations and quarterly reporting apply to FSC members, SFC members, Governor/Vice Governors/Assistant Governors/Auditor and FSS employees; aggregate transaction reporting threshold now KRW 10 million. - At FSS, internal restrictions: trades cannot be margined, no more than 50 trades per quarter, annual total value of trades cannot exceed 50 percent of earned income reported for taxation; trades restricted to avoid conflicts or use of non-public information. - Blind trust may be required for FSC in certain circumstances. - Monitoring, breaches and enforcement: - FSS internal audit and Internal Audit and Inspection Office survey executives and employees post-inspection to detect inappropriate examiner behavior; whistleblower protections in place. - One FSS employee was criminally prosecuted in 2012 for unlawful disclosure relating to suspension of mutual savings banks. - Assessment: Broadly Implemented; noted confusion among staff about scope/application of trading restrictions and lack of documented monitoring procedures. ### Systemic risk monitoring and macro/micro frameworks (Principle 6) - Macro-prudential coordination and bodies: - MPFM (Council) convened since July 2012 by Vice Minister MOSF, Vice Chair FSC, Deputy Governor FSS, Deputy Governor BOK, Vice President KDIC; MoU executed September 2012 to share annual, periodic and material event reports. - KCIF (“Watch Dog”) provides global daily real-time market monitoring and issues alerts. - FSS houses explicit macro-prudential function under Senior Deputy Governor for Planning and Management. - Indicators and frameworks: - “Handy Indicators of Financial Institutions”: 10 relate specifically to securities. - RAMS (Risk Analysis and Management System), MERF, and micro-indicators for brokers/banks/insurers complement macro analysis. - Early warning levels and stress testing performed; scenario analysis and stress testing conducted. - Concerns and recommendations: - Siloed risk assessment and potential undervaluation of contagion from securities sector to other sectors. - Mutual savings banks collapse cited as evidence that liquidity crises can become solvency crises. - Authorities limited securities companies’ access to call market to 25 percent of their capital; further reforms pending. - Assessment: Broadly Implemented; source recommends more serious consideration of securities-originated systemic risk and better mapping of interconnections. ### Perimeter of regulation and issue identification (Principle 7) - Legal perimeter and enforcement: - “Fund raising” rule: must be by authorized or exempt entity; Act on the Regulation of Conducting Fund-Raising Business Without Permission criminalizes unauthorized fund-raising—up to five years imprisonment and fine up to KRW 50 million. - FSCMA Articles 11 and 17 prohibit investment advisory or discretionary investment activity without registration/authorization. - Processes for perimeter review and escalation: - FSS conducts annual self-assessment / 360 degree reviews and thematic examinations; internal audit function provides feedback. - Industry bodies, advisory committees and media can surface perimeter issues. - Example: FSS discovered industry selling loans as commercial paper to evade requirements; issued guidance to constrain such activities. - Assessment: Broadly Implemented; recommendation to document and refine perimeter policing, escalation and dissemination processes to avoid silo effects. ### Conflicts of interest and incentive alignment (Principle 8) - Legal and firm-level requirements: - Financial investment business entities must implement systems to prevent conflicts of interest on initial approval and ongoing operation (FSCMA Articles 12(7) and 18(6); Enforcement Decree Article 31 et seq.). - Prohibitions include: research compensation tied to underwriting success (Article 71(3)), post-release trading based on forecasts for 24 hours (Article 71(2)), and restrictions during IPO processes (Article 71(4)). - SROs, CRAs, auditors: - SROs required to impose ethical standards and Chinese walls; analyst information posted on KOFIA website. - CRAs and other evaluators subject to conflict of interest rules; auditor independence addressed under Principles 19–21. - Assessment: Fully Implemented. ### Self-regulatory organizations and their oversight (Principle 9) - Statutory SROs and roles: - KRX: operates listed equity, bond and derivatives markets and KOSDAQ; performs market surveillance and member supervision; ≈ 696 staff, 121 for market surveillance, 100 for listing/disclosure review. - KOFIA: membership-based SRO with 165 regular, 116 associate and 20 special members; conducts investor protection, registration of professionals, business conduct rules, dispute resolution, OTC bond registration; oversight staff 36. - KICPA: compulsory membership for CPAs; 16,000 members; responsible for ethics, registration of CPAs, training, limited disciplinary measures; 125 audit firms (32 supervised by FSS). - KSD: central depository (70.4 percent owned by KRX) with statutory functions and FSC approval of business rules. - Oversight by FSS: - FSS inspects KRX and KOFIA biennially; KRX surveyed by FSS full-scope on-site in 2008 and 2010; KOFIA in 2009 and 2011. - FSS can require submission of rules, reports and can terminate delegations if performance improper. - Assessment: Fully Implemented; source suggests clarifying membership numbers publicly and improving publication of exchange disciplinary outcomes. ### Inspection, investigation and surveillance powers (Principle 10) - FSS inspection powers: - Articles 37–40 AEFSC and Article 419 FSCMA establish inspection authority; FSS required to submit reports to FSC when inspections complete. - On-site examinations: prior written notice typically given at least one week before start; exceptions allow no-notice with specified grounds; documentary examinations without prior notice. - Powers to request reports, data, affidavits, testimonies, books and other documents; authority to require appearances and oral statements. - KRX and market surveillance: - KRX responsible for frontline market surveillance (Article 377 FSCMA); must notify FSC when suspect violations found; provides FSS real-time trading access. - FSS lacks an electronic market surveillance system; conducts batch analysis. - Record-keeping requirements (preserve numeric retention periods exactly): - Trading/order records: ten years; - Management of investors' property (collective/discretionary/trust): ten years; - Records of property deposited/withdrawn by investors: five years; - Records of safekeeping of property deposited: five years; - Records of each investor’s orders: ten years; - Records of each investor’s transactions: ten years. - Delegation to SROs: - Governor of FSS may delegate examination work to KRX or KOFIA (Article 419(8) FSCMA); KOFIA conducts branch examinations on behalf of FSS and must report results promptly. - Assessment: Fully Implemented for powers to inspect/investigate/surveil regulated entities. ### Enforcement powers, sanctions and criminal cooperation (Principle 11) - Powers to require information from persons beyond regulated entities: - FSC and SFC can order any person to submit reports or materials (Article 426 FSCMA); non-compliance punishable by up to three years imprisonment or fine not exceeding KRW 100 million. - Administrative measures against regulated entities and executives (selected lists exactly as presented): - Regulated entities: revoke authorization or registration; suspend business up to six months; order transfer contracts; order correction/discontinue violation; order public disclosure; institutional warning/caution; take measures in Article 373(5) Enforcement Decree (close branches, demand compensation, file criminal complaints). - Executives: request for dismissal; suspension from office up to six months; disciplinary warning; warning; caution. - Employees: removal from office; suspension up to six months; salary reduction; reprimand; warning; caution. - Pecuniary penalties and limits: - Civil money penalty of 20 percent of violated amount for cross-ownership/related-party lending breaches (Article 428 FSCMA) when intentional or grossly negligent. - FSC may impose civil money penalty within limit of 3 percent of value of public offering or sale (maximum KRW 2 billion) for disclosure breaches (Article 429 FSCMA); penalties only when breach intentional or grossly negligent. - Fine for negligence not exceeding KRW 50 million in certain FSCMA violations (Article 449 FSCMA). - Criminal process and referrals: - FSC/SFC/FSS cannot initiate criminal proceedings but can refer matters to public prosecutor’s office; public prosecutor’s office has powers under Criminal Litigation Procedures. - Criminal provisions in FSCMA (Articles 443–449), Act on External Audit of Stock Companies (Articles 19–21) and CPA Act (Articles 53–54); maximum penalties include imprisonment for life or not less than five years for certain unfair trading where profit/loss threshold KRW 5 billion or more. - Market suspension: - FSC may alter KRX opening hours, suspend transactions or temporarily close securities market in defined circumstances. - KRX rule: suspend trading of all issues when KOSPI declines by 10 percent or more from previous day's closing and persists one minute; resume after twenty minutes. - Assessment: Broadly Implemented; comments that administrative sanctions beyond cancellation/suspension are not highly dissuasive and monetary penalties are limited and constrained. ### Enforcement effectiveness, timeliness and case statistics (Principle 12) - Examination coverage and cycles: - Financial investment business entities: general examinations every three years for large/medium capital firms; RAMS used monthly for risk scoring; thematic/partial examinations deployed. - Collective investment business entities: examination cycle approx six years for AUM ≥ KRW 2.5 trillion and seven years or more for AUM < KRW 2.5 trillion. - CRAs: examined every 3–4 years; audit firms: FSS audit quality review cycle 2–5 years; KICPA review cycle 5–7 years. - On-site examinations 2011–2012 (financial investment business entities): - 2011: General Examination 11; Partial Examination 44; Ordinary Partial Examination 43; Thematic Examination 20; Total 118. - 2012: General Examination 5; Partial Examination 52; Ordinary Partial Examination 29; Thematic Examination 19; Total 105. - Collective investment on-site examinations 2010–2012: - 2010: Total 58 (General 6 for AUM ≥ KRW2.5 Trillion; General 2 for AUM < KRW2.5 Trillion; Partial ordinary 15; Thematic 35). - 2011: Total 53 (6; 2; 10; 35). - 2012: Total 42 (4; 1; 11; 26). - Enforcement outcomes and sanctions (selected aggregates and tables preserved as in source): - Financial investment business entities: total on-site actions across 2010–2012 show figures such as FSC revocation/suspension cases and FSS institutional cautions and management attention; example totals presented: 2012 = 23; 2011 = 50; 2010 = 43; Total = 116 (specific table entries preserved in source). - Executives and employees sanctions (aggregates preserved): employees total sanctions across 2010–2012: 2012 = 1,087; 2011 = 203; 2010 = 120; Total = 1,410 (table as in source). - Unfair trading case flows and outcomes: - Case volumes: - Deferred from previous year: 2012 = 165; 2011 = 152; 2010 = 159 - Newly received: 2012 = 271; 2011 = 222; 2010 = 194 - Closed: 2012 = 243; 2011 = 209; 2010 = 201 - Pending (A+B-C): 2012 = 193; 2011 = 165; 2010 = 152 - Many cases referred to public prosecutor’s office; FSS passed 80 cases to FSC that were dismissed without administrative sanction or criminal referral. - Timeliness: - Average time from KRX examination/FSS investigation of an unfair trading case to decision by SFC: 382 days (average provided by FSC). - Public prosecutor’s indictment stage: on average 260 to 364 days in past five years. - Indictment and outcomes (aggregate table preserved): - Classification 2010–2012 totals: Cases referred to public prosecutor’s office (a = b + c) = 138152 180470 (table formatting retained in source; source notes limited public information on court outcomes). - Probation rates for securities-related crime 2006–2011 (first trials): - Insider trading: Imprisonment 2 (6.3%); Probation 30 (93.7%) - Market manipulation: Imprisonment 20 (13.4%); Probation 129 (86.6%) - Fraudulent unfair trading: Imprisonment 2 (100%); Probation 0 (0%) - Effectiveness observations and follow-up actions: - Source notes long durations in investigative/enforcement pipeline and limited access to outcomes of criminal cases by regulators. - Post-mission steps reported by authorities (source narrative): referral management improvements—FSS set up a team on August 1, 2013 to follow up unfair trading cases referred to prosecutors; updated case statistics provided indicating reduction in pending cases (from 247 to 136) and increase in closed cases (from 223 to 334) with 278 indicted of the 334 closed (preliminary data). - Assessment: Partly Implemented; recommendation to improve timeliness, coordination and dissuasiveness of sanctions and to strengthen information flows from prosecutorial/court outcomes to regulators. ### Cooperation, information sharing and cross-border assistance (Principles 13–15) - Domestic information sharing: - Article 65 AEFSC: MOSF, FSC and BOK may request data from each other; receiving agency required to comply except in extenuating circumstances. - Article 58 AEFSC: Governor of FSS must present data as requested by FSC or SFC; Governor may request cooperation from other administrative agencies (e.g., immigration) where necessary. - MoU signed among MOSF, FSC, BOK, FSS, KDIC on MPFM operation and information sharing (see Principle 6). - Cross-border information sharing and agreements: - Article 437 FSCMA: FSC may exchange information with foreign financial investment supervisory agencies and cooperate in investigations/examinations under reciprocity. - FSC and FSS jointly admitted as Appendix A signatory to IOSCO MMoU in 2010. - FSC/FSS jointly signed MoUs with foreign regulators in 20 countries (source statement). - Practice and request volumes: - Number of requests from foreign regulators and average processing time: - 2010: Fit and Proper 37; Supervision/Examination 4; Investigation of Illegal Activities 2; Total 43; Average time 17 - 2011: Fit and Proper 32; Supervision/Examination 6; Investigation 0; Total 38; Average time 13 - 2012: Fit and Proper 31; Supervision/Examination 2; Investigation 5; Total 38; Average time 19 - Confidentiality and scope: - Information shared must be used per stated purpose; confidentiality of requests can be maintained under IOSCO MMoU. - FSC and FSS can share beneficial ownership and bank record information related to securities and derivatives transactions and brokerage accounts sufficient to reconstruct transactions. - Assessment: Fully Implemented. ### Issuer disclosure and primary market regime (Principle 16) - Definitions: - Public offering: invitation to at least 50 investors to make offers to acquire securities newly issued (Article 9(7) FSCMA). - Public sale: inviting offers to purchase already issued securities from at least 50 investors (Article 9(9) FSCMA). - Small offerings threshold: aggregate value below KRW 1 billion may be offered without registration (Article 120(1) Enforcement Decree). - Registration statement timing (effective periods from submission to FSS) preserved exactly: - Stock-listed corporations: - Equity securities public offering / Guaranteed rights offering: 10 days - Allocation to shareholders / Allocation to third parties: 7 days - Debt securities: - Guaranteed corporate bonds / Secured debentures / Asset-backed securities: 5 days - Others: 7 days - Other securities: 15 days - Content requirements of registration statements: - Matters concerning public offering/sale: details of rights to securities; investment risks; underwriter's opinion where applicable; purpose of fund use. - Matters concerning issuer: company overview; details of business; financial affairs; external auditor's audit opinion; organization/affiliates; shareholders; executives/employees; transactions with interested parties; other matters specified by FSC. - Shelf-registration and supplements: - Well-known/seasoned issuers may use shelf-registration under Article 121 Enforcement Decree; supplements required at each public offering under shelf-registration. - Record-keeping and public access: - DART system retains and provides public access to filed disclosures; the FSS and FSC publish handbooks, newsletters and annual reports. *Source: IMF staff assessment text as provided in the content unit.* ### 1. Matters concerning the asset holder: ### _cr14309 - 1. Matters concerning the asset holder: ### Matters concerning the asset holder - Required disclosures (items listed): - (a) An overview of the asset holder; - (b) Details of business; - (c) Matters concerning financial affairs; and - (d) Matters concerning executives. ### Matters concerning securitized assets - Required disclosures: - (a) A detailed list of securitized assets by type; - (b) Details of evaluation of securitized assets; and - (c) Methods of transfer of securitized assets and a detailed plan for transfer. ### Matters concerning the asset-backed securitization plan - Required disclosures: - (a) The detailed structure of the asset-backed securitization plan; - (b) A plan for issuance and repayment of asset-backed securities; - (c) The asset manager and the method of management of assets; and - (d) A plan for borrowing and management of funds. ### Requirement to file an investment prospectus - Legal basis: - Article 123 of the FSCMA requires that when an issuer publicly offers or sells securities, it must file an investment prospectus with the FSC on the day on which the relevant registration statement becomes effective and make it available to the public at the issuer’s head office and branches, the FSS, the KRX, and places where subscriptions can be made. - Content and omissions: - An investment prospectus is not permitted to contain any descriptions different from those included in the registration statement or omit any such description. - Descriptions may be omitted from the registration statement and investment prospectus if necessary in consideration of the balance between confidentiality in corporate management and protection of investors (Articles 123 and 129 FSCMA). - Possible omitted descriptions include matters classified as military secrets and matters confirmed by the FSC among those concerning the business affairs or operations of the issuer (Articles 131(5) and 136 Enforcement Decree of the FSCMA). - According to the FSS, the latter refers to matters pertaining to business secrets of the issuer. Such descriptions may be omitted after confirmation by the FSC. - Financial information: - On the basis of Article120 of the FSCMA, the most recent audited financial information is required to be attached to the registration statement for public offerings. ### Regulatory review of the registration statement - FSC/FSS powers and process: - If a registration statement has not been prepared in conformity with the prescribed form, contains any false description or representation of a material fact, or contains any omission, uncertain description or representation of a material fact which might undermine reasonable investment decision of investors or significantly mislead investors, the FSC may demand that the issuer present the reasons for it and submit a corrective registration statement with correct contents no later than the day before the date set for offering to acquire or purchase the securities stated in the registration statement (Article 122 FSCMA). - Filing a corrective registration statement restarts the time period at the end of which the registration statement becomes effective. - FSS review resources: - According to the information provided by the FSS, it reviews all securities registration statements. - 27 staff members are involved in reviewing them and other disclosure documents in the Corporate Disclosure Department, with 5 additional staff members in charge of reviewing the relevant registration statements in the Derivatives, Trust, Structured Products and Pension Department. - Volume of registration statements and corrections (annual counts): - Equity securities and others: - 2010: 401 - 2011: 226 - 2012: 149 - Of which corrected (equity securities and others): - 2010: 112 - 2011: 63 - 2012: 52 - Debt securities: - 2010: 1553 - 2011: 1578 - 2012: 1267 - Of which corrected (debt securities): - 2010: 7 - 2011: 10 - 2012: 15 - ABS: - 2010: 47 - 2011: 45 - 2012: 66 ### Advertising of public offering outside a prospectus - Short-form investment prospectus: - According to Article 124(2) of the FSCMA, a person who intends to advertise a public offering or sale of securities required to be registered must use a short-form investment prospectus. - A short-form investment prospectus refers to a document, an electronic document, or any other similar description or representation that omits a part of the mandatory descriptions of the investment prospectus or makes an abstract of the important descriptions. - It must be prepared in a manner prescribed in Article 134 of the Enforcement Decree of the FSCMA and published through an advertisement, notice, or leaflet via newspapers, broadcasting, magazines, or electronic transmission media, after the relevant registration statement has been accepted. ### Periodic Disclosure Requirements - Annual business report and other periodic reports: - Article 159(1) of the FSCMA requires stock-listed corporations and certain other corporations to submit their annual business reports (accompanied by the consolidated financial statements) to the FSC and the KRX within ninety days of the closing of the business year. - Article 167 of the Enforcement Decree of the FSCMA defines the other corporations as follows: - 1. Issuers that have listed any of the following securities on the securities exchange: - (a) Equity securities other than stocks; - (b) Unsecured corporate bonds; - (c) Convertible bonds, bonds with warrant, participating bonds, or exchangeable bonds; - (d) Instruments representing preemptive rights to new stocks; - (e) Securities depository receipts (limited to securities depository receipts related to stocks or the securities under items (a)-(d) above); and - (f) Derivative-combined securities. - 2. Issuers that do not fall under item 1 but publicly offered or sold (excluding small offerings and sales) any of the following securities: - Stocks; and - Securities falling under item 1 above. *IMF staff report excerpt: _cr14309 - 1. Matters concerning the asset holder:* ### 3. Issuers that are corporations subject to external audit under Article 2 of the Act on External Audit of ### 3. Issuers that are corporations subject to external audit under Article 2 of the Act on External Audit of ### Scope and filing and disclosure systems - Applies to issuers that are corporations subject to external audit under Article 2 of the Act on External Audit of Stock Companies, if the number of persons who hold securities of the issuer are at least 500 persons. - All issuers that have made a public offering or sale or whose securities are listed are subject to the requirement to prepare an annual business report. - The FSS adopted the XBRL disclosure system in its Data Analysis, Retrieval and Transfer (DART) system in October 2007, and requires listed companies to submit financial statements by using XBRL in their annual, half-yearly and quarterly business reports. - Disclosures are also available through the KRX Korea Investor’s Network Disclosure (KIND) system. ### Filing deadlines and extensions - Deadline for submitting consolidated financial statements is extended to 120 days for corporations whose total assets are less than KRW 2 trillion as at the end of the latest business year and that do not apply the K-IFRS. - A corporation obligated to submit an annual business report must also submit half-yearly and quarterly reports for three months and nine months both to the FSC and the KRX within 45 days of the closing of each term, with an extension to 60 days in case of consolidated financial statements for the first and second business years (Article 160 FSCMA). - The FSC and the KRX are required to keep the annual business reports and half-yearly and quarterly reports for three years and to disclose them to the public. - Foreign corporations may submit a business report within 120 days (instead of 90 days) of the closing of the business year, and may submit a half-yearly or quarterly report within 60 days (instead of 45 days) of the closing of each term (Article 176(2) Enforcement Decree of the FSCMA). - If a foreign corporation has submitted any document equivalent to a business report to its home country, it may submit it along with a Korean translation within ten days (or five days in case of a report on material facts) from the day on which it submitted such a document. ### Required content of annual business reports - Business report must describe the purpose, trade name and details of business of the corporation, the remuneration of executives, the matters concerning finance, and the following matters (Article 159(2) FSCMA and Article 168(1) Enforcement Decree of the FSCMA): - An overview of the company; - Matters concerning the organization of the company, including the board of directors, and its affiliated companies; - Matters concerning shareholders; - Matters concerning executives and employees; - Details of transactions with major shareholders (including their specially related persons), executives, or employees of the company; - Matters concerning financial affairs and annexed statements; - The external auditor's audit opinion; and - Other matters specified and publicly notified by the FSC as those of which it is necessary for investors to be informed. ### Half-yearly and quarterly reporting and auditor involvement - Half-yearly and quarterly reports do not have to include an external auditor’s audit opinion. - Half-yearly report must always include the external auditor’s review report. - Quarterly reports: external auditor’s review report required for financial institutions subject to the FSS examinations under Article 38 of the AEFSC and for stock-listed corporations whose total assets reached or exceeded KRW 500 billion as at the end of the latest business year. ### Related party transactions disclosure - Disclosure of related party transactions is addressed in Articles 10(1) (1)–(5) of the Guidelines on Corporate Disclosure Filings. - Direct and indirect transactions with credit risk; asset transfers, exchanges, or gifts; or transactions in excess of certain threshold amount with a large shareholder, a person specially related to a large shareholder, or an executive or employee must be disclosed in annual business report and half-yearly and quarterly reports. ### Material event (material fact) disclosures and timing - Under Article 161 of the FSCMA, a corporation obligated to submit a business report must submit a material fact report to the FSC by the day immediately following the day on which the event occurs for events including (non-exhaustive list): - When a bill or check issued by the corporation is returned or its check account transactions in a bank are suspended or banned; - When its business activities are completely or partially suspended; - When an application is filed for commencement of proceedings for rehabilitation under the Debtor Rehabilitation and Bankruptcy Act; - When a cause or event occurs that triggers the corporation's dissolution under the FSCMA, the Commercial Act, or any other Act; - When the corporation's board of directors adopts a resolution to increase or reduce its capital; - When the company becomes a subsidiary or parent company or a resolution on a merger is adopted (Articles 360-2, 360-15, 522, or 530-2 Commercial Act); - When a resolution to transfer an essential business or asset is adopted; - When a resolution to acquire or to dispose of treasury stocks is adopted; - When any other cause or event may produce a significant impact on the management, assets, etc., as specified further by the Enforcement Decree of the FSCMA, including: - (a) Any measure under Article 7(1) or 7(2) of the Corporate Restructuring Promotion Act taken by a principal creditor bank under Article 2(3) of the same Act; - (b) Any lawsuit that is likely to have a material impact on the securities is filed; - (c) Where stock certificates are, or are decided to be, listed or de-listed on foreign securities markets, or where de-listing, suspension, or other measures are taken by foreign supervisory agencies or exchanges; - (d) Decision on issuance of convertible bonds, bonds with warrants or exchangeable bonds; - (e) Decision on a contract that grants a put back option for a predetermined value; and - (f) Any other event specified and publicly notified by the FSC. ### Regulatory review of disclosures - The FSS Corporate Disclosure Department reviews important sections of all annual business reports in its area; financial information is reviewed by the Accounting Supervision Department. - All material fact reports are reviewed by the FSS. If the review reveals material misstatements or omitted material information, the issuer may be required to make necessary changes and file the report again. - Listed companies are also subject to detailed material event disclosure requirements under KRX regulations. ### Liability and sanctions for disclosure failures (period 2010–2012) - Persons liable for damages if false or omitted material facts appear in registration statements or prospectuses include: - The registrant and directors at the time of filing; - Persons who instructed or executed preparation of the registration statement; - Qualified certifiers (CPA, certified appraiser, credit rating specialist, attorney-at-law, patent attorney, tax accountant) who certified descriptions; - Persons who consented to and confirmed their evaluation statements; - Underwriters and persons who prepared or delivered the investment prospectus; - The holder of the securities for sale at the time the registration statement was filed. - Number of sanctions imposed for violations of disclosure rules: - Material fact report: 2010: 17, 2011: 22, 2012: 18 - Periodic report: 2010: 26, 2011: 12, 2012: 19 - Report on new issuances: 2010: 18, 2011: 11, 2012: 13 - Others: 2010: 30, 2011: 3, 2012: 1 - Total: 2010: 91, 2011: 48, 2012: 51 ### Cross-border filings and modified obligations for foreign issuers - Number of securities registration statements filed by foreign issuers with the FSC (all for initial public offering): - 2010: 8 - 2011: 3 - 2012: 3 - Foreign corporations may use extended filing deadlines (see Filing deadlines and extensions) and may submit equivalent home-country documents with Korean translation within specified short timelines. - Foreign issuers intending to list at the KRX must disclose in registration statements whether they intend to comply with home jurisdiction laws rather than Korean requirements (Article 129 Enforcement Decree of the FSCMA). ### Assessment and comments on disclosure regime - Assessment: Fully Implemented. - Comments: - Korean disclosure requirements are very prescriptive, particularly regarding material event disclosures. - Market participants had mixed views: some accept duplication given investor protection objectives; others consider there is too much information and difficulty in filtering essential information. - The prescriptive material event disclosure requirements and the following-day deadline for material event disclosures are noted as not in line with international best practice despite compliance with IOSCO Assessment Methodology minimums. - Disclosures are made efficiently and transparently through the interlinked FSS DART and KRX KIND systems. ### Key related company and shareholder governance provisions (summarized) - Different classes of shares are permitted (Article 344 Commercial Act); common stock generally: one vote per share (Article 369(1) Commercial Act). - Notice requirements for shareholder meetings: at least two weeks prior written or electronic notice (Article 363 Commercial Act); public notice for bearer share certificates: at least three weeks prior. - Concentrated voting for director elections available when requested by shareholders holding at least 3 percent (Article 382-2 Commercial Act). - Major corporate actions (transfer of whole or substantial business, takeovers) require affirmative votes of at least 2/3 of voting rights of shareholders present and at least 1/3 of total outstanding shares (Article 374 Commercial Act); dissenting shareholders have appraisal/purchase rights with timelines and court valuation mechanisms (Article 374-2 Commercial Act). - Shareholder registers: directors must keep register at principal office; information required includes name and address of each shareholder, classes and number of shares, serial number of certificates, and date of acquisition (Articles 396 and 352 Commercial Act). - Transferability: Shares are required to be transferable, but articles may condition transfers on board approval (Article 335 Commercial Act). ### Major shareholding disclosure and change of control rules - Major shareholder definitions (Article 9 FSCMA): - A principal who together with specially related persons holds the greatest number of stocks of outstanding voting stocks; - A significant shareholder: (a) holds 10 percent or more of total outstanding voting stocks; or (b) exercises de facto control. - Ongoing disclosure obligations: - A person acquiring at least 5 percent of stocks must report aggregate holdings and purpose to FSC and KRX within five days of acquisition (Article 147 FSCMA). - Changes of at least 1 percent must be reported within five days if the purpose is to exercise influence on issuer control. - If reported as "investment only", reporting deadline moves to the tenth day of the following month. - Executives and senior management must report equity security holdings within five days of becoming executives or of changes; FSC and KRX keep these reports for three years and disclose them online (Article 173 FSCMA). ### Accounting and audit requirements (Principle 18 and related) - Registration statements and annual business reports must include external auditor's audit opinion. - Registration statements for public offers must be accompanied by: - An external auditor's audit report; - An external auditor's consolidated audit report; - An external auditor's semi-annual audit or review report; - An external auditor's quarterly audit or review report (Article 125(2) Enforcement Decree of the FSCMA and Article 2-6(8) Regulation on Issuance, Public Disclosure, Etc. of Securities). - Annual business reports must be accompanied by consolidated financial statements and external auditor’s audit reports on both corporation and consolidated financial statements (Article 168(6) Enforcement Decree of the FSCMA). - Companies subject to external audit under Article 2 of the Enforcement Decree of the Act on External Audit of Stock Companies include those meeting any of: - Total assets at least KRW 10 billion as of end of preceding business year; - A stock-listed corporation or a stock company intending to become listed during current or following business year; - Total liabilities and total assets amount to at least KRW 7 billion respectively as of end of preceding business year; - Number of employees exceeds 300 as of end of preceding business year and total assets at least KRW 7 billion. - Financial statements include balance sheet; income statement; statement of changes in stockholders' equity; statement of cash flow; and footnotes (Article 1-2 Act on External Audit of Stock Companies). - K-IFRS mandatory since 2011 for specified entities (stock-listed corporations; companies intending to list; financial holding companies; banks; certain FSCMA entities; insurance companies; credit card business entities). Other companies may apply Korean GAAP. ### Standard-setting, supervision, and enforcement for accounting and audit (Principles 19–21) - FSC determines accounting standards after deliberation of SFC; duty entrusted to Korea Accounting Institute (KAI)/Korea Accounting Standards Board (KASB) including interpretations; public exposure period of 30 days before vote. - KAI must have a committee of competent experts and receives subsidy equal to 5 percent of fees collected by FSS; KAI must set aside at least 30 percent of the subsidies as a reserve subject to FSC approval. - Supervision and enforcement: - SFC conducts supervision over audit reports; review duties delegated to FSS and KICPA. - FSS may request companies or auditors to submit data, inspect books and documents, review auditor working papers and interview those involved. - FSS reviews audit engagements and assesses issuers’ compliance with accounting standards, can demand access to books and order on-site visits. - Sanctions imposed on issuers for non-compliance with accounting standards (2010–2012) — categories and totals: - Notification to prosecutors: 2012: 11, 2011: 11, 2010: 25 - Civil money penalty: 2012: 22, 2011: 17, 2010: 27 - Fine: 2012: 0, 2011: 1, 2010: 1 - Disciplinary warning/caution: 2012: 9, 2011: 13, 2010: 13 - Restriction on issuance of securities: 2012: 27, 2011: 26, 2010: 41 - Recommendation for dismissal of relevant executive officers: 2012: 20, 2011: 17, 2010: 22 - Letter assuring no recurrence of misconduct: 2012: 1, 2011: 0, 2010: 0 - Designation of outside auditor by the regulatory authority: 2012: 46, 2011: 43, 2010: 67 - Correction action demanded: 2012: 11, 2011: 11, 2010: 18 - Total: 2012: 147, 2011: 139, 2010: 214 - Note: totals may differ from sums of categories where companies received multiple sanctions. - Foreign issuers listed at the KRX may prepare financial statements based on K-IFRS; IFRS; or Generally Accepted Accounting Principles of the United States (Article 176(6) FSCMA). - Assessment for accounting standards: Fully Implemented. - Comments: Infrastructure for K-IFRS establishment and enforcement is in place; accounting fraud by top management continues to be a problem; need to strengthen enforcement powers (including restricting eligibility for executives for up to two years) linked to auditor measures. ### Auditor oversight, independence, and standards (Principles 19–21) — key points - CPA qualification and registration: - CPA examination administered by FSS with delegation from FSC; registration delegated to KICPA. - CPA must complete apprenticeship training not less than one year before registration to render audit services. - Audit firms (accounting corporations) must register with FSC and meet requirements including: - At least three directors who are CPAs; - At least ten CPAs among directors and employees; - Capital of at least KRW 500 million. - Responsibility for audit oversight: - SFC: legal responsibility to review audit reports and quality control environments. - FSC: registers CPAs, refuses/withdraws registration, disciplines registered CPAs. - FSS: delegated supervision of audit reports on stock-listed corporations and certain financial institutions; supervises auditors auditing more than 1 percent of stock-listed corporations, auditors of companies with total assets at least KRW 1 trillion, auditors with more than 30 registered CPAs, and others. - KICPA: supervises auditors not under FSS responsibility; registration functions delegated; must obtain SFC approval for its regulations and report results to SFC. - Outcome of delegations in practice: - FSS supervises 32 out of 125 audit firms; these 32 firms audit about 85-90 percent of stock-listed corporations. - Small auditors of companies listed on Freeboard of KOFIA may be excluded from FSS oversight and subject only to KICPA. - FSS audit report review and audit quality review practices: - Reviews approximately 10 percent of audit reports falling under its responsibility, plus additional 5 percent for cause. - Audit quality review cycle depends on number of stock-listed corporations audited by the firm: - Firms auditing 100 or more stock-listed corporations: every two years. - Firms auditing 20 to less than 100: every three years. - Firms auditing less than 20: every three to five years. - FSS reviews compliance with independence requirements and ISQC 1 quality control policies. - KICPA review practices: - Audit Quality Control Supervisory Committee reports to Audit Quality Review Committee. - Team of 11 members reviewing audit reports by sampling; on-site quality control visits every five years (seven years for audit teams). - Enforcement powers and measures: - SFC may recommend measures to FSC, restrict services, require additional contributions, warning/caution, correction orders, and recommend cancellation/suspension of registration. - FSC may cancel registration or suspend services under CPA Act; may impose civil money penalty in lieu of business suspension (not exceeding KRW 500 million on audit firms and KRW 100 million on CPAs). - KICPA may take disciplinary measures similar to SFC/FSC for matters under its remit. - Criminal sanctions under Article 53 of the CPA Act include: - Imprisonment with prison labor for not more than three years or fine not exceeding KRW 10 million for intentional concealment or false report or divulgence of confidential matters; - Imprisonment with prison labor for not more than one year or fine not exceeding KRW 5 million for auditing in violation of independence requirements; - A fine not exceeding KRW 5 million for providing audit services without registration. - Enforcement measures taken against auditors and CPAs (summary tables for 2010–2012): - Violations of auditing standards: total sanctions on CPAs — 2010: 126, 2011: 98, 2012: 103 (individual sanction types include charges to prosecutors, cancellation, suspension, warnings, cautions, restrictions, mandatory training, etc.). - Violations of independence requirements — audit firms: monetary fines (2010: 6, 2011: 5, 2012: 4); disciplinary warnings (2010: 15, 2011: 12, 2012: 10); cautions (2010: 11, 2011: 9, 2012: 6); additional payment to joint fund for damages (2010: 40, 2011: 32, 2012: 40); restriction of audit of particular companies (2010: 43, 2011: 33, 2012: 38); total: 2010: 69, 2011: 54, 2012: 57. - Note: statistics separating sanctions by authority (KICPA vs FSS/SFC/FSC) were not available. - Independence requirements: - Act on External Audit of Stock Companies and CPA Act prohibit audits where financial interests or employment relationships exist as prescribed. - Financial interest thresholds: credits or liabilities worth at least KRW 30 million for CPAs, KRW 100 million in case of an audit firm (Enforcement Decree of the CPA Act). - Rotation and replacement requirements: an audit firm cannot have the same director perform audit business for six consecutive business years (four for stock-listed corporation); for stock-listed corporations, a director who audited for three consecutive business years cannot conduct audits for the next three consecutive business years (Article 3(4) Act on External Audit). - Prohibitions on providing certain non-audit services during audit engagement (Article 14(2) Enforcement Decree of the CPA Act). - KICPA Code of Ethics (§290) and Korean Standards on Auditing mandate policies and procedures to identify and address threats to independence; auditors must consult/obtain approval from internal auditor or audit committee for permitted non-audit services. - Audit standards: - KAASB under KICPA sets KSAs; KSAs were based on former ISAs (pre-2004) and differed from clarified ISAs; new KSAs issued in December 2012 and will take effect from period commencing January 1, 2014. - Process for adopting/revising standards includes public exposure (normally 30 days), KAASB vote, SFC Accounting Policy Deliberation Committee review, FSC approval, and publication. - Assessments: - Principle 19: Assessment — Broadly Implemented. Comments note recurring misconduct, need for strengthened oversight and enforcement, particularly for smaller audit firms inspected every three to five years; proposed legislative amendments in 2013 to root out accounting fraud and poor auditing. - Principle 20: Assessment — Broadly Implemented. Comments note independence requirements incorporate key issues but challenges in enforcement and availability/use of high-quality independent audit services. - Principle 21: Assessment — Broadly Implemented. Comments: KSAs not fully aligned with clarified ISAs at time of report but will be from January 1, 2014; significant number of sanctions for violations of auditing standards. *Italic: Extracted from the IMF country report chapter titled "3. Issuers that are corporations subject to external audit under Article 2 of the Act on External Audit of" (Republic of Korea).* ### 2014. In line with the other Principles covering enforcement of various requirements on accounting, ### _cr14309 - 2014. In line with the other Principles covering enforcement of various requirements on accounting, ### Principle 22 — Credit rating agencies: registration, supervision, oversight requirements, assessment - Description: Registration - Obtaining a credit rating from at least two credit rating agencies is mandatory in Korea in the case of public offers of corporate bonds and issuance of commercial papers. - If a CIS intends to invest in a privately placed security, such a security also has to have a credit rating. - Article 2(12) of the Use and Protection of Credit Information Act defines a credit rating service as assessing the probability of repayment of the principal and interest in connection with financial instruments, credit facilities, etc. and the credit worthiness of companies, legal entities, indirect investment vehicles, etc. for the purpose of protecting investors. - Credit rating business is one type of credit information business, and any person who intends to engage in credit information business is required to obtain a license from the FSC (Article 4). - Article 6(1) of the Use and Protection of Credit Information Act: any person who intends to obtain a license for credit information business must satisfy the following requirements: - The applicant has to have sufficient human resources and physical facilities, including computer equipment, to carry out credit information business; - The applicant has to have reasonable and sound business plans; - Major investors of the applicant have to have sufficient investment capacity, viable financial standing and social credibility; and - The applicant has to have a sufficient level of expertise to perform credit information business. - Any person who intends to be licensed to engage in credit rating business has to possess capital of at least KRW 5 billion (Article 6(2) (1)). - There are currently four licensed credit rating agencies (CRAs) in Korea, although one of them is not authorized to provide credit ratings for corporate bonds. - No foreign CRAs provide credit rating services in Korea, but three of the four Korean CRAs are majority owned by foreign CRAs. - Article 5(2) of the Use and Protection of Credit Information Act: a corporation is prohibited from being licensed to provide credit rating services if at least 10 percent of its capital is invested by a company that is part of a conglomerate or a financial institution or its affiliates. - The FSC may cancel the license of a credit information company in certain cases (Article 14). The FSC may also issue an order to wholly or partially suspend business for a specified period of not more than six months, if a credit information company does not continue to satisfy the requirements of sufficient human resources and physical facilities (Article 6(4)), or violates Article 11 or 28 of the Act. - Description: Ongoing Supervision - A credit rating agency is required to submit to the FSC documents to identify its rating capabilities, including a credit rating performance report, etc., and provide such documents to the KRX and KOFIA to make them available to the public (Article 29(5) Act on Use and Protection of Credit Information). - Article 45(1) of the Act: the FSC supervises whether a credit information company complies with the Act and orders under it. The FSC may, if necessary, order a credit information company to report in relation to its business, financial standing, etc. - The Governor of the FSS may have the personnel of the FSS inspect the business and financial standing of a credit information company; request submission of data; have persons concerned attend meetings and state their opinions; and must report the findings of an examination to the FSC. - In practice, the FSS conducts a regular on-site examination in the CRAs every three or four years. - Oversight Requirements: Quality and Integrity - CRAs must prescribe internal control standards and verify compliance (Article 29(7) Use and Protection of Credit Information Act and Article 26(2) related Enforcement Decree). - Internal control standards must address: - Separation of the rating and sales organization; - Prohibition of conflicts of interest; - Prohibition of unfair practices; - Introduction of credit rating criteria appropriate for the nature of rated entities; - Recording and storage of rating related data; - Development of internal procedures to review the adequacy of credit ratings; - Examination of compliance with the internal control standards for executives and employees; and - Procedures for the establishment and amendment of the internal control standards. - CRAs should have an appropriate rating methodology requiring that a credit rating team composed of professional analysts carries out the credit rating business; the process should be consistent and methodology periodically updated; CRAs should continue to monitor rated entities and regularly publish results after completing ratings. - CRAs are required to adopt a guideline on collecting, treating and using internal corporate information; materials relating to the credit rating business must be recorded and stored (documents, electronic materials, micro film, etc.) for the minimum period determined by the CRA. - Oversight Requirements: Conflicts of Interest - Article 29: a CRA must consider comprehensively both the client’s current status and outlook when assessing credit worthiness. - No CRA may perform credit rating activities on any person in a special relationship with the CRA, including a person having an investment relationship exceeding a given ratio; other investment relationships must be specified in the credit report. - CRAs are prohibited from providing a credit rating on a person who contributed more than 10 percent of the CRA’s total revenue during the last fiscal year. - An analyst who owns shares of the rated company, has important business relationships such as discussing the commission, or has received a gift or treatment from borrowers of the rated company, issuers of securities or underwriters, is prohibited from providing a credit rating. - Oversight Requirements: Transparency and Timeliness - CRAs are required to disclose through their internet homepage or publicly when an important part of the credit rating methodology, practices or processes has been changed. - Oversight Requirements: Confidential Information - Article 29(9) of the Act: no person who is or was an executive or employee of a CRA is permitted to disclose any client’s trade secrets obtained during the course of business except: - If the trade secret is provided and used for purposes agreed by the client; - If provided subject to a court order or a warrant issued by a judicial officer; or - If provided pursuant to other Acts. - Trade secrets are permitted to be used only for CRAs’ rating activities. - Assessment and Comments - Assessment: Fully Implemented - Comments: - Credit rating agencies have been subject to regulation and supervision in Korea since 2000. - A bill currently being considered by the National Assembly is intended to transfer legal provisions applicable to CRAs from the Use and Protection of Credit Information Act to the FSCMA; this change is largely technical but expected to give more emphasis on investor protection rather than protection of privacy. ### Principle 23 — Other evaluators and sell-side analysts: frameworks, registration, oversight, assessment - Sell-side Analysts - The legal framework intended to prevent conflicts of interest and the overall requirements relative to duty of loyalty, fairness and honesty for persons performing evaluative or analytical services are described under Principle 8. - Requirements include identification, monitoring, mitigation, disclosure and/or prevention of conflicts of interest; system of internal controls and related compliance procedures; compliance personnel review for proper treatment, mitigation, disclosure and prohibition of conflicts; limits on contingent compensation to research analysts related to underwriting activities. - Korea generally follows standards for sell-side analysts advocated by IOSCO (see also Principle 29). - Other Evaluators (bond pricing agencies, fund rating agencies) - The system in Korea makes use of bond pricing agencies. There are four bond pricing agencies, each related to one of the four CRAs; created at government direction to develop a more reliable yield curve and assist pricing of illiquid products. - Other rating services include rating of collective investment schemes and evaluations related to mergers, acquisitions and real estate investment vehicles. - The law provides for registration and supervision of bond pricing agencies and fund rating agencies (FSCMA Articles 258 and 263). - The Enforcement Decree (Articles 285–288) provides registration criteria and standards of operation including: - Provisions for maintaining consistency and staying abreast of accepted standards; - Prohibition on misuse of non-public information; - Prevention of use of information developed for pricing for any other business of the company; - Disclosure of pricing standards to the public; - Notification and publication of changes in bond prices/yields; - Requirement for maintenance of policies and procedures relative to conflicts of interest; and - Supervision to ensure the policies and procedures are being followed. - Article 238 of the FSCMA: debt securities of a collective investment scheme should be valued at market price, but at fair market value if no market price is available on the valuation date. Market price usually means the closing market price traded or publicly announced. - Article 260 of the FSCMA: in the case of debt securities traded on an overseas exchange and debt for which a price has been formed for ten or more days continuously for three months immediately before the valuation date, price information provided by two or more bond pricing agencies may be used. - Bond pricing agencies typically develop independent price evaluations and disseminate mark-to-market data on thinly traded bonds; they also develop bond, derivatives, portfolio, and market and credit risk management systems and may evaluate straight bonds, structured bonds and OTC derivatives. - Market participants including asset managers providing collective investment schemes and their administrators must use at least two pricing agencies when such are used for pricing purposes. - Pricing methodologies are based on guidance from the KAI and proprietary models used by providers. - KOFIA imposes substantial regulations on business conduct for financial services providers including special members that provide valuation services to CIS; bond pricing agencies and fund rating agencies are special members of KOFIA and subject to its regime as well as FSC regulations. - Assessment and Comments - Assessment: Fully Implemented - Comments: - Korea appears to be ahead of international best practice in applying a similar regime to CRAs to other pricing and rating agencies whose ratings and assessments are required by law. - Authorities should keep abreast of international discussions on pricing methodologies and benchmarks, the potential for abuse, and best practice for oversight. - Authorities should have clear rules related to switching among pricing models and agencies and regulatory access to relevant information relative to pricing. ### Principles for Collective Investment Schemes — Principle 24: legal forms, authorization, governance, supervision - Legal Forms Required from Collective Investment Schemes and their Operators - Article 9(18) of the FSCMA: the term collective investment scheme means any of the following forms established for making collective investment: - A trust (investment trust); - A stock company under the Commercial Act (investment company); - A limited liability company under the Commercial Act (investment limited liability company); - A limited partnership company under the Commercial Act (investment limited partnership company); - An association under the Civil Act (investment association); - An undisclosed association under the Commercial Act (undisclosed investment association); and - A limited partnership company that invests and manages its fund in equity securities, etc. for participation in management, improvement of business structure, corporate governance, etc. by issuing equity securities only through private placement (private equity fund). - In practice, all publicly offered CIS in Korea have been established as investment trust or investment company. The same applies to privately placed CIS, except one established as an investment limited liability company; Principles 24–27 focus on investment trusts and investment companies. - A privately placed fund is a CIS that issues collective investment securities only through private placement, where the total number of investors cannot exceed a prescribed number (Article 9(19) FSCMA). The definition of private placement for CIS is similar to that used for other securities. - Entities involved in operating and managing a CIS - The collective investment business entity runs the collective investment business; the trust business entity keeps in custody and manages the collective investment property. - A trust business entity needs authorization for trust business; in practice banks provide these services to collective investment business entities. - Investment traders and investment brokers are responsible for selling collective investment securities. - Where applicable, a general administration company may be entrusted with the affairs of an investment company. - Authorization Requirements - Collective Investment Schemes - Article 182 of the FSCMA: a CIS to be created has to be registered with the FSC. - If a collective investment business entity or an investment company files a registration application together with a registration statement, the relevant CIS is deemed registered when the registration statement becomes effective; thus only privately placed funds must be registered with the FSC (or the FSS under delegation). - The process for filing the registration statement for CIS is the same as for other securities (see Principle 27). - Operating/marketing a Collective Investment Scheme - Article 12 of the FSCMA: an entity that wishes to obtain authorization for financial investment business (including collective investment business) is required to be a stock company under the Commercial Act. A foreign financial investment business entity may also be authorized in certain circumstances. - A collective investment business entity must comply with: - Equity capital of at least KRW 1-6 billion; - Feasible and sound business plan; - Human resources, an electronic computer system, and other physical facilities; - Fit and proper executives; - Good financial standing and social credibility; and - System for preventing conflicts of interest between the collective investment business entity and investors, as well as between a specific investor and other investors. - Those who wish to market a CIS must obtain authorization from the FSC for investment trading business or investment brokerage business under Article 12 of the FSCMA; this requirement applies also to banks, insurance companies and other financial institutions that may distribute CIS. - Article 16(4) of the Enforcement Decree of the FSCMA: an applicant’s business plan must include information on the internal control system appropriate for risk management and prevention of financial incidents. - Every financial investment business entity is required to establish a risk management system to identify, assess, monitor, and control all transaction risks in a timely manner (Article 3-42 of the Regulations on Financial Investment Business). - All financial investment business entities must establish and manage risk and transaction limits for each department, each transaction, and each product; they are required to assess and manage market risk, operational risk, credit risk, and liquidity risk, and identify and monitor changes in major risks comprehensively and jointly with their subsidiaries. - The Governor of the FSS may assess the adequacy of the current status of risk management of each financial investment business entity and reflect the results in FSS supervision and examinations. - Table 2., Section 3.C. of the Regulations on Financial Investment Business: supervisory and internal control systems must be appropriate for ensuring executives' and employees' compliance with laws and regulations, risk management, and prevention of wrongdoing, based on the authorized business unit and its size. - Table 2, Section 4.A of the Regulation on Financial Investment Business: required system for prevention of conflicts of interest, including internal control guidelines for detection, assessment, and management of conflicts and appropriate Chinese walls. - When the FSS receives an application for collective investment business, it reviews documents and conducts an on-site visit; it prepares a report for the FSC deciding on authorization. - Soliciting investment in foreign collective investment schemes - Foreign CIS can be sold in Korea only after the scheme has been registered with the FSC (Article 279(1) FSCMA). In principle, the same requirements apply for registration of a foreign CIS as a domestic one. - Supervision and Ongoing Monitoring - The powers of the Governor of the FSS to conduct examinations and demand reports and material under Article 419 of the FSCMA apply also to collective investment business entities. - Information on general and partial examinations conducted in collective investment business entities is provided in Principle 29. *Source: _cr14309 - 2014. In line with the other Principles covering enforcement of various requirements on accounting,* ### 12. There are currently 85 collective investment business entities, 21 of which were subject to a general ### _cr14309 - 12. There are currently 85 collective investment business entities, 21 of which were subject to a general ### Supervision, examinations and coverage - There are currently 85 collective investment business entities; 21 were subject to a general examination during 2010-2012. - Thematic examinations focus on large asset management companies; small asset management companies receive little examination attention due to low AUM and limited incident history. - As of March 2013, Fund Distribution by Aggregate AUM (Trillion KRW): - Over 10: No. of firms 10, Aggregate AUM 193.9, Share (%) 58.5 - Over 5: No. of firms 7, Aggregate AUM 48.1, Share (%) 14.6 - Over 1: No. of firms 32, Aggregate AUM 79.0, Share (%) 24.0 - Below 1: No. of firms 36, Aggregate AUM 8.8, Share (%) 2.7 - Total: 85 firms, Aggregate AUM 329.8, Share (%) 100.0 - FSS does not conduct examinations of trust business entities (custodians) specifically focused on custody services for CIS; custody issues are examined as part of general bank examinations. - Assessment: Broadly Implemented. - Comment: On-site examination program does not provide sufficient coverage for small collective investment business entities; custodians should be subject to targeted FSS examinations. ### Enforcement and supervisory measures - Enforcement measures used by FSS and FSC over the past three years range from minor FSS measures to cancellation of one license in 2012 by the FSC (see Principle 12 for details). - Enforcement of disclosure obligations (sanctions on CIS operators/executives/employees over the past three years): - 2010: 22 - 2011: 7 - 2012: 6 - Total: 35 - FSS imposed one salary reduction, one caution against employee, 13 management recommendations for improvement, 13 action requests, and 7 on-site actions; FSC issued one severe institutional caution. ### Periodic reporting and monitoring - Article 90 FSCMA: CIS must prepare a business report each quarter and submit to FSC (delegated to FSS) and KOFIA no later than two months after quarter end. - FSS and KOFIA disclose business reports publicly via Internet homepages; KOFIA compares CIS performance and discloses results. - FSS monitors asset management companies monthly using Handy Indicators (see Principle 6); results described in management status evaluation reports. - Reporting of material changes: Revised registration with FSC required within two weeks for changes in registered matters (Article 182 FSCMA), except where investor protection is not undermined. ### Record-keeping, conflicts of interest, and conduct of business - Record-keeping periods (Article 187 FSCMA and Article 214 Enforcement Decree): - A list of collective investment property: ten years; - The ledger of base price of collective investment securities: ten years; - A full statement of management of collective investment property: ten years; - Minutes of general meeting of collective investors and directors' meeting: ten years; - Other account books/documents as required by other Acts: period prescribed in relevant Act. - Conflicts of interest: - Article 84 FSCMA: CIS entity prohibited from transactions with interested parties (executives, employees, major shareholders and spouses) unless exemptions apply; must notify trust business entity without delay in such cases. - Article 44 FSCMA: financial investment business entity must probe and assess likelihood of conflicts of interest and notify relevant investors; trading only after reducing conflicts to acceptable level. - Conduct of business: - No specific statutory requirement on “best interest” or “best execution”; fiduciary duty of due care exists (Article 79 FSCMA). - Article 80 FSCMA: CIS entity must give trust business entity transaction instructions separately for each investment trust property; trust business entity must comply. - Prohibitions: cannot manage collective investment property contrary to collective investment agreement or investment prospectus, or trade too frequently disregarding scheme policy (Article 85 FSCMA; Article 87(4) Enforcement Decree). ### Delegation and outsourcing - Article 42(1) FSCMA: financial investment business entity may entrust third parties with part of its affairs but not if likely to undermine investor protection or sound practice. - Permitted entrustments (Article 45 Enforcement Decree) limited to: - Management of foreign currency denominated assets and not more than 20 percent of KRW-denominated assets; - Research and analysis related to collective investment; - Valuation of collective investment property. - Entrustment agreement must include scope, restrictions, record-keeping terms, termination and compensation; must be reported to FSC. - Article 42(7) FSCMA: entities must establish guidelines for management of entrusted affairs covering investor information protection, risk management, control and supervision of trustee, countermeasures against incidents, and means to demand written information. - Trustee subject to on-site examinations by Governor of FSS (Article 43(1) FSCMA). - Civil liability: Article 756 Civil Act applies to damages inflicted by trustee; employer liable unless due care exercised. ### Principle 25 — Legal form, segregation and investor protection (summary) - Legal forms described under Principle 24 (not repeated here). - Changes to investor rights: material amendments to trust contract require resolution at general meeting of collective investors. - Ad hoc public disclosure (Article 89 FSCMA) required without delay for: - Replacement of fund manager and new manager’s career; - Decisions on deferment or resumption of redemption and reasons; - Details of non-performing assets and depreciation rate; - Details of general meeting resolutions; - Other matters necessary for investor protection per Enforcement Decree. - Ad hoc disclosure channels: CIS entity homepage, seller (investment trader/broker) homepage, KOFIA, electronic mail to investors, and public notices at offices. ### Investment restrictions and compliance - Statutory investment restrictions (Articles 81 and 82 FSCMA) include (examples): - Equity securities: - No investing in same securities in excess of 10 percent of total assets of each CIS; - No investing total assets of all CIS managed by entity in equity securities of same corporation in excess of 20 percent of total number of equity securities; - No investing assets of each CIS in equity securities of same corporation in excess of 10 percent of total number of equity securities. - Over-the-counter derivatives: - No trading with counterparties not meeting qualification requirements; - Counterparty risk for OTC derivatives must not exceed 10 percent of total assets of each CIS. - Funds of funds: - Restrictions including 50 percent, 20 percent, 40 percent related limits depending on situation. - Borrowing: - No borrowing on CIS account except in momentary redemption liquidity cases; total loans cannot exceed 10 percent of collective investment property at time of borrowing (Article 83 FSCMA). - Trust business entity responsibility: examine CIS entity compliance with investment restrictions; demand withdrawal/revision/rectification; report to FSC if CIS fails to comply within three business days. - FSS monitors compliance via periodic reporting and on-site inspections. - Assessment: Broadly Implemented. - Comment: Mission could not verify effective monitoring/enforcement of prohibition on trust business entity being affiliate of CIS entity (Article 246). ### Segregation, safekeeping of assets and winding up - Article 246(1) & (3) FSCMA: trust business entity must separate collective investment property from proprietary, other collective investment property and third-party entrusted property; specified securities must be deposited in securities depository. - Trust business entities must execute instructions separately for each CIS (Article 246(4) FSCMA). - Article 246(2) FSCMA: trust business entity prohibited from being an affiliated company of the investment company or CIS entity; some FSS staff unaware of this, and examination manual section lacks explicit reference. - Winding up: - Article 202 FSCMA: investment company dissolution triggers liquidator requirements—report to FSC within 30 days, liquidators' meeting, potential dismissal/appointment of liquidators by FSC. - Liquidator duties include property inspection, preparation of property list and balance sheet, creditor notices (public notice at least twice, filing claims period at least one month), settlement report submission to FSC and KOFIA. - Investment trust termination: prior FSC approval required except where no possibility of undermining beneficiaries’ interests; immediate termination cases include expiration of trust term, general meeting resolution, absorbed merger, revocation of registration. - Assessment: Broadly Implemented. - Comment: Mission could not verify effective monitoring/enforcement of related party custody prohibition. ### Principle 26 — Disclosure (initial and ongoing) - Initial disclosure (Article 119(6) FSCMA; Article 127 Enforcement Decree) registration statement must contain: - Matters concerning public offering/sale: details of rights, investment risks, underwriter's opinion. - Matters concerning scheme: name; purposes/policy/strategy; management remuneration, sales commissions and other expenses; financial affairs; information on collective investment business entity (including promoters, supervisory directors); professional investment managers; management of collective investment property; sale and buy-back; valuation and public disclosure; profit/loss distribution and taxation; trust business entity and general administration company; delegation of affairs. - FSS reviews all CIS registration statements within the 15 day time period. - Number of registration statements filed (Total number / Number of new registration statements): - 2010: 17,501 total, 671 new - 2011: 15,913 total, 791 new - 2012: 14,390 total, 548 new - Ongoing disclosure (Article 89 FSCMA; Article 93(3) Enforcement Decree) must include without delay: - Replacement of fund manager and career details; - Decision on suspension/resumption of redemptions and reason; - Details of non-performing assets and depreciation rate; - Resolutions of general meeting of collective investors; - Other than formal/insignificant prospectus revisions; - Mergers/divisions/transfers of business of entity; - Changes in base price due to calculation error (subject to Principle 27 exemptions); - Possible termination due to low asset value (Article 192(1) FSCMA). - Periodic reporting (Article 88 FSCMA; Article 92 Enforcement Decree): - CIS must prepare asset management report at least once every three months and deliver to investors after trust business entity confirmation. - Report must include: assets and liabilities and base price (annual or quarterly); summary of management progress and profit/loss; ratio of assessed value of each asset type; total number of stocks traded, total trading amount, turnover rate; details of investment assets; information on professional investment managers; investment environment and management plans; investment by business/country; dividends; top ten investment items; structure of CIS; details on derivatives used to avoid exchange risk. - Delivery to investors within two months from reference date via KSD or seller or by electronic mail (Article 92(4) Enforcement Decree). - K-IFRS applied to trust account from fiscal year 2011. - Standardized order for registration statements and periodic reports required. - Advertisements (Article 57 FSCMA; Article 60 Enforcement Decree): - Permitted content limited; must include recommendation to read prospectus and risk of principal loss; past performance must carry disclaimer that past performance does not guarantee future return. - Internal control guidelines required; compliance officer must confirm advertisement in advance; drafts submitted to KOFIA for examination; advertisements must state KOFIA/compliance officer examination completion. - Enforcement of disclosure obligations: See sanctions numbers above (2010–2012 total 35). - Assessment: Fully Implemented. ### Principle 27 — Valuation, pricing, redemptions and related rules - Asset valuation (Article 238 FSCMA): - Must value collective investment property according to market price; if no reliable market price, value at fair value as prescribed in Enforcement Decree. - Market price: closing market price on securities/derivatives exchange. - Exceptions for debt securities using bond pricing agencies under specified conditions. - Fair value determined by committee on valuation considering acquisition prices, trading prices, prices from bond pricing agency/audit firm/credit rating agency/appraisal entity/underwriter/etc., exchange rates, and base prices. - Money market funds may be valued at book value if investors frequently change or investor protection not undermined (Regulations on Financial Investment Business Article 7-36); book value monitoring required if difference between book and market/fair value exceeds or is likely to exceed 50 basis points. - Note: weighted maturity of money market fund assets at most 90 days, planned to be reduced to 60 days (footnote). - Book price formulas: - Debt securities: price calculated by depreciating the difference between acquisition cost and face value at maturity over repayment period by effective interest rate method and adding/subtracting price to/from acquisition cost and interest income. - Non-debt assets: price calculated by adding acquisition cost and interest income accrued until valuation date. - Valuation committee required; trust business entity must review valuation fairness and compliance. - Base price computation and disclosure: - Base price = (total assets - total liabilities as of day before posted base price) / total number of collective investment securities as of same day (Article 238(6) FSCMA; Article 262 Enforcement Decree). - Daily public notice/posting of base price required; alternative periods up to 15 days allowed by agreement if daily posting difficult. - External audit required within two months from end of financial term except where total assets < KRW 5 billion; auditor must determine compliance with valuation standards and inform internal auditor/audit committee. - Subscription and redemption: - Investors may claim redemption at any time (Article 235 FSCMA). - Upon redemption request via seller, CIS entity must pay redemption money on day prescribed by collective investment agreement within 15 days from request; exceptions in Article 254 Enforcement Decree based on realizability of assets. - Pricing errors: - Article 262 Enforcement Decree: if base price error discovered, must revise and publicly notify/post corrected base price unless difference does not exceed thresholds: - Equity securities traded in domestic market: 0.2 percent; - Equity securities traded in foreign market: 0.3 percent; - Money market funds: 0.05 percent; - Other CIS: 0.1 percent. - Revision requires confirmation of compliance officer and trust business entity and reporting to FSC, including written statement describing changed base price, reasons, and investor protection measures (Article 7-37 Regulations). - Article 64 FSCMA: general liability for damages from violations; no automatic obligation to compensate investors for subscription/redemption at wrong price. - FSS information: between May 11, 2011 and June 14, 2013, FSC was informed of seven cases where CIS entities compensated investors voluntarily. - Suspension of pricing and redemptions (Article 237 FSCMA): - Permitted where disposal impossible due to exchange closure/natural disaster; where equality among investors threatened; where dissolution of counterparty prevents redemption; or other similar causes deemed necessary by FSC. - Decision on suspension/resumption must be disclosed without delay (Article 89 FSCMA). General meeting of collective investors must be held within six weeks after postponement to resolve redemption matters. - Assessment: Broadly Implemented. - Comments: - Money market funds’ ability to use book value contradicts IOSCO Methodology principle favoring market/fair values; IOSCO Policy Recommendations on Money Market Funds (October 2012) further restrict book value use subject to safeguards. - No automatic obligation to compensate investors for pricing-error losses; recommend introducing a compulsory requirement to ensure enforceability of compensation. ### Principle 28 — Hedge funds and hedge fund managers - Hedge fund managers must be authorized as collective investment business entities; application requirements same as regular collective investment business (Principles 24 and 29). - Korean hedge funds can only be privately placed funds for qualified investors. - Article 249-2 FSCMA: privately placed fund for qualified investors must be reported to FSC within one month of creation/establishment. - Applicable regulatory requirements: - Internal control guidelines (Article 28 FSCMA), risk management (Article 3-42 Regulations), conflicts of interest (Article 44 FSCMA), segregation of client money/assets (Principle 25). - Capital and prudential: - Articles 30 and 31 FSCMA: hedge fund managers subject to net operating capital ratio of 150 percent or higher; also subject to soundness in business management requirements. - Disclosure to investors: - Hedge funds (being privately placed) are not subject to Articles 88–90 FSCMA periodic/ongoing disclosure or base price disclosure (Principle 26 and 27). - KOFIA guidelines require hedge fund managers to prepare an investment prospectus and establish a policy on scope of other information to provide to investors (performance, counterparties, custody arrangements). - Audit requirements for other CIS (Article 240 FSCMA) do not apply to hedge funds. - Disclosure to regulator: - Article 249-2(7) FSCMA: CIS entity must report to FSS current status of hedge funds’ borrowing and derivatives trading. - Article 271-2(6) Enforcement Decree: quarterly report for each hedge fund including: - Current status on borrowing and trading of derivatives; - Current status on guarantee of liabilities or provision of collateral; - Major fund-managing strategies and types of investment assets; - Matters concerning investment risk management. - Supervision and enforcement: - Governor of FSS has power to inspect hedge fund managers and demand reports (Article 419 FSCMA). - As of assessment, hedge funds introduced in late 2011; FSS had not yet conducted on-site examinations of hedge fund managers. - FSC has same powers to take measures against hedge fund managers and personnel (Articles 420 and 422 FSCMA). - Article 4-102(4) Regulations on Financial Investment Business: prime brokers must report credit extension and collateral conditions to Governor of FSS, including credit extension to hedge funds. - Assessment: Broadly Implemented. - Comments: - KOFIA guideline-based investor disclosure considered sufficient given qualified investor restriction; absence of audit requirement for hedge funds may undermine disclosure quality and regulator reports. - FSS plans to start on-site examinations of hedge funds in December 2013; recommended to proceed to monitor sector growth. ### Principles 29–31 — Market intermediaries: authorization, capital, internal governance - Authorization/registration requirements (Article 6 FSCMA): business lines requiring authorization/registration include investment trading, investment brokerage, collective investment business, investment advisory, discretionary investment, and trust business. - Authorization prerequisites: - Equity capital of at least KRW 500 million per authorized business unit; - Feasible and sound business plan; - Proper human resources, certified staff, fit and proper executives (Article 24 statutory disqualifications), financially sound and socially credible major shareholders; - Appropriate physical facilities and sufficient IT systems; - Internal controls including internal audit, compliance officer with at least 10 years’ experience, outside directors; - Total assets over KRW 2 trillion at end of preceding fiscal year (Articles 13 and 25–28 Enforcement Decree). - Advisory/discretionary businesses: must register; capital of KRW 100 million per unit; registrants cannot execute transactions for clients. - Authorization process: two-stage with public exposure period; FSS handles processing; FSS often does not conduct “nursery visits” and may not audit new licensees until three years of operations. - Ongoing requirements: report organizational changes, shareholdings, executives, branch openings/closures, authorized business unit changes; periodic financial reporting and capital compliance. - Denial/suspension/revocation: possible for violations, false applications, failure to meet soundness; upon revocation business must be dissolved. - Record-keeping: minimum three years (FSCMA Article 60). - Trust business concerns: significant business conducted through trusts not structured as CIS or discretionary business; potential misuse risk since trusts managed by brokers as legal owners. - Assessment Principle 29: Fully Implemented. - Capital and prudential (Principle 30): - Minimum capital applied business-unit by unit; Articles 30 and 31 FSCMA require continuous net operating capital maintenance; assets constituting capital discounted per guidance (reserves up to 100 percent). - Margin loans limited to 100 percent of firm equity capital and subject to additional limits by product type. - Capital must be calculated daily, reported monthly (by end of following month); gross risks and net capital computed; quarterly audited reports due 45 days after quarter end and posted on company website. - Early warning: net capital ratio early warning level 150 percent; triggers for immediate reporting include capital reductions or 10 percent reduction. - Provisioning categories from FSS Handbook: normal (0.5), precautionary (2), doubtful (75), estimated loss (100) — numbers reflect required provisioning. - FSS applies RAMS to evaluate underwriting/brokerage/trading firms; no similar manual for collective investment business entities. - Credit risk monitoring: Article 4-34 Regulation requires daily reports on credit extensions to KOFIA; KOFIA reports excesses to FSS. - Corrective actions: range from management improvement recommendations to business closure or appointment of administrator when capital falls to 100 percent; firms have two months to develop management improvement plan. - Customer funds: Article 74 FCSMA requires separation of investor funds from proprietary property and placement in deposit or trust account with Korea Securities Finance Company (KSFC). - Group risk: Financial Holding Company Act applies only to approved financial holding companies (total assets ≥ KRW 100 billion and control over financial institutions); non-covered groups not subject to group risk supervision. - Assessment Principle 30: Fully Implemented. - Comment: Time frames for filing financial reports and two-month remediation period may be too long given market volatility; capital calculated daily mitigates some timing concerns. - Internal organization and compliance (Principle 31): - Firms required to maintain compliance/internal functions, compliance officer, internal audit; management accepts primary responsibility. - Assessment Principle 31: Broadly Implemented. - Comment: FSS/FSC should ensure sufficient monitoring of allocation of trades and handling of orders at brokers; consider review of fairness outcomes in dispute resolution as consumer protection develops. ### Principles 32–36 — Failure procedures, exchanges, market transparency and market integrity - Failure procedures and contingency planning (Principle 32): - FSC/FSS do not have a documented contingency plan addressing market intermediary failure, but have substantial powers and data access (KRX) and access to arrangements for customer funds and settlement completion. - Exchange rules include margin, default, and settlement fail procedures; KRX and KSD have funds and reserves. - Early warning and mitigation: - Ongoing monitoring, price limits, circuit breakers; - Risk rating via off-site and on-site analysis with “trigger events” for intensified review; - Measures to support settlement conclusion if firm fails; - Deposit insurance regime applies to deposits (KDIC) with KRW 50,000,000 per investor protection for covered items. - KRX maintains joint compensation fund and fidelity fund; KRX joint compensation funded at KRW 200 billion each for securities and derivatives; KRW 400 billion settlement reserve (fidelity fund); line of credit KRW 1.5 trillion; KRX capital KRW 50 billion; KSD OTC share settlement fund KRW 50 billion and reserve KRW 200 billion. - Act on the Structural Improvement of the Financial Industry provides restructuring powers and remedies (admonition, capital measures, suspension, merger, transfer of business, etc.). - Assessment Principle 32: Broadly Implemented. - Comment: Agencies should consider joint crisis simulation and default remediation exercises; two-month remediation period may be excessive. - Exchanges and trading systems (Principles 33–35): - KRX is the unified exchange operating multiple platforms (KOSPI, KOSDAQ, KOFEX, KONEX as of July 2013); KRX had 94 members as of December 2012. - KRX governance: Market Supervision Committee; duties include clearing and settlement responsibilities (Articles 377-384, 388 FSCMA). - KRX provides trading in equities, bonds, ELW, ETFs, futures, options, interest rate futures; overnight links with Eurex and CME for KOSPI 200. - Market activity and market statistics: - KRX Number of Listed Companies: End 2009 1,788; End 2010 1,798; End 2011 1,816; End 2012 1,784. - Market Cap, USD Billion: End 2009 834.6; End 2010 1,091.9; End 2011 996.1; End 2012 1,179.4. - Market Cap, KRW Trillion: End 2009 971.9; End 2010 1,239.2; End 2011 1,147.6; End 2012 1,262.7. - Value of Bond Trading, USD Billion: End 2009 438.1; End 2010 515.6; End 2011 716; End 2012 1,285.6. (Source: World Federation of Exchanges.) - Comparative February 2013 exchange data (selected): - Korea Exchange: Number of Listed Companies 1,780; Domestic Market Capitalization (USD Billion) 1,192.8; Value of Bond Trading (USD Million) 95,258.4; Share Turnover Velocity (%) 95.7. (Source: World Federation of Exchanges.) - Market composition: - Retail-driven: more than 60 percent of trading activity retail; - Foreign investor daily trading ~20 percent; investment trusts ~10 percent; institutional investors ~5 percent; insurance funds <1 percent; banks <5 percent. - KOSPI 200 futures/options average daily contracts traded: 7.4 million. - Trading and market safeguards: - Price fluctuation limits ±15 percent equity-by-equity; - Circuit breakers: KOSPI declines 10 percent -> halt 20 minutes after one minute; 5 percent decline -> suspend receipt of orders for five minutes. - Exchange may suspend trading in emergencies or for market stabilization. - Financial integrity: - KRX acts as CCP for exchange-traded securities pre-settlement and for futures; exchange funds and settlement waterfalls exist. - KRX joint compensation fund KRW 200 billion each for securities and derivatives; KRW 400 billion settlement reserve; KRW 1.5 trillion credit line; KRX capital KRW 50 billion. - Transparency and trade reporting: - KRX displays bids/offers in real time; publishes daily trading volume, settlement prices, high/low/close for securities and exchange-traded derivatives. - Block trading: facility exists; price must be within price band (30 points); blocks reported end of day with volume only (price not reported); block thresholds low (USD 50,000 KOSPI; USD 20,000 KOSDAQ); block volume <1% overall trading value. - OTC bond market: reporting permitted but anecdotal evidence suggests post-trade reporting at settlement; KOFIA bond reporting service exists; four bond pricing agencies aid valuation. - Supervision of exchange and trading systems: - KRX is front-line overseer; FSS/FSC supervise and conduct biennial inspections; FSS can take action including suspending business, ordering correction, institutional warnings (Articles 410, 416, 419 FSCMA). - Exchange surveillance system: Intermarket Surveillance Information System (ISIS); real-time monitoring; trading records retained for 10 years. - Assessment: - Principle 33: Fully Implemented. - Comment: Clearing/settlement waterfall should be prominently displayed on KRX and KSD websites and linked via FSC. - Principle 34: Fully Implemented. - Comment: More FSS in-house capacity for exchange trading and IT monitoring recommended; examination and sanctioning processes should be made substantially more transparent. - Principle 35: Fully Implemented. - Comment: Block trading regime deficiencies noted (price not reported, small uniform block threshold); low block volume mitigates impact but regime should be improved; timely OTC bond trade reporting could be enhanced. - Market integrity and unfair trading practices (Principle 36) - FSCMA prohibits insider trading and misuse of material non-public information; requires reporting of significant shareholdings and return of short-swing profits (Article 172, Article 173, Articles 174–175). - Exchange rules and FSC/FSS/KRX investigatory powers permit detection and deterrence of manipulation and unfair trading; exchange may request data and impose member sanctions (Article 404 FSCMA). - Assessment: Implementation and legal framework in place per source; detailed enforcement examples and statistics provided elsewhere in the full assessment. *Source: IMF assessment document content as provided in the supplied excerpt.* ### introduction of false information into the market (Articles 176 and 178). See also the related Enforcement ### introduction of false information into the market (Articles 176 and 178). See also the related Enforcement ### Exchange enforcement rules and prohibited practices - KRX has member rules, real time trade surveillance, a disclosure system, and comprehensive investigative powers; KRX can take action and request members to take action against offending employees. - Subject to review by the FSC, the exchange Enforcement Rules (see VIII § 3 and 4) prohibit practices deemed inconsistent with customer protection or market fairness, including: - Front running; - Wash trading; - Banging the close; - Guarantees against loss; - Recommendations for customers directly contrary to proprietary positions taken fairly contemporaneously; - Submitting quotations in a manner that gives a false appearance of a price; - Excessive quotations (and related cancellations); - Using a third party to improperly obtain a gain or a loss for one’s own account against a customer; and - Providing false information to the market. ### Exchange reporting, disciplinary actions and sanctions - KRX is required to report violations of exchange rules that are also violations of the FSCMA, but may still bring its own actions. - Sanctions by the exchange can include: - Expulsion from membership; - Suspension of membership privileges or trading privileges in whole or in part; - Imposition of a fine amounting a minimum of KRW 10 million and a maximum of KRW 1 billion; and - A warning notice or a caution. - Enforcement activity in 2010–2012: - The exchange conducted 565 investigations in its members to ensure compliance with its rules. - In 112 cases, disciplinary action was taken as a result of the investigation. - Four cases were referred to the FSS, and 453 cases were closed without action. ### Insider trading and manipulation case referrals (2010–2012) - In suspected insider trading or market manipulation, KRX refers cases to the FSS rather than taking disciplinary action itself. - Reported referrals by type and year (as presented in source): - Type of Violation 2010 2011 2012 - Price manipulation 13612692 - Insider trading 797873 - Other things 4245117 - Total 257249282 ### Complaints and dispute resolution - KRX operates a complaints and dispute resolution process; categories and counts reported: - KRX's Classification of Complaints and Disputes - 2010 | 2011 | 2012 | 2013 (Jan–Jul) - Discretionary trading: 17 | 7 | 11 | 7 - Unauthorized trading: 8 | 8 | 16 | 7 - Undue recommendation: 14 | 17 | 17 | 14 - Errors in dealing with orders: 12 | 25 | 16 | 9 - Computerized trading operational errors: 30 | 33 | 29 | 10 - Others*: 8 | 17 | 18 | 9 - Total: 89 | 107 | 107 | 56 - *Others: Liquidation, breach of fiduciary duty, regulation violation, etc. - The FSS can review these complaints and their disposition as part of oversight. ### Cross-border and cross-market arrangements - FSC and FSS are signatories of the IOSCO MMoU and 20 bilateral MoUs. - KRX has executed MoUs and arrangements (example names provided in source) and has surveillance links with CME and Eurex to monitor position limits. - KRX operates both derivatives and equity markets, coordinating circuit breakers, trading halts, and information sharing between cash and derivatives markets. - Assessment: Fully Implemented (with comment that criminal enforcement deficiencies under Principle 12 impacted that rating). ### Exchange-based monitoring of exposures, short positions and market protections (Principle 37) - Exchange arrangements to monitor and address material exposures include: - Real time trade monitoring; - Reports on short interest, in particular net short positions in excess of 0.01 percent of total issuance (within three days of acquisition); - Up-tick rules; - Position limit requirements for derivatives; - Symmetric (up and down) individual security price limits; - Market wide circuit breakers; - Ability to call a trading halt; - Process of novation (exchange becomes the central counterparty); - Back-up systems of financial/liquidity support to address fails to deliver securities or to meet obligations, such as margin, to the market; - Pre-funding of accounts and automatic liquidation for insufficient margin; - The ability to close out positions if a market participant refuses information to the exchange; and - Limitation of margin lending by brokers. - The means for aggregating exposures is not documented. - Short-selling: - Law restricts naked short sales (FSCMA Article 180). - Notifications of net short interest are required; uptick rule applies. - Exceptions exist for arbitrage activities and market making. - Rules 17 and 18 of the KRX business regulations provide detail on what is “covered” and the requirement of an “agreement to borrow.” ### Default procedures, resources for redress, and concerns - Exchange rules and FSCMA set requirements for composition and valuation of member contributions to compensation and fidelity funds, inability to encumber deposits, and a waterfall of resources in event of default; however: - This information is not readily accessible on exchange, KSD or regulatory websites. - Definition of what constitutes a default is implied rather than stated. - Clearing member accountability: - Clearing member is accountable to KRX for its customer‘s default. - KRX members as a whole may be accountable under a common bond arrangement to support settlement where an individual member is unable to do so. - Market participant concerns: - KRX limits risk to margined transactions with 30 percent deposit of the value of the security and automatic sale if margin is not timely paid; market participants view this as potentially precipitating a destabilizing price cascade despite price limits and circuit breakers. - Exchange and FSS believe crisis measures could stage such sales if necessary. ### Clearing and settlement framework (summary as presented) - Proprietary and customer denominated accounts: underlying customer ownership determinable from Investor Account Book managed by broker. - Not all securities dematerialized; some issues with “extra-legal” nominees and potential identification of exposures. - KSD introduced a CNS system in 2012; in initial implementation phases after a three month testing period. - Fails permitted for delivery of shares, not for derivatives. - Transactions in foreign securities must pass through a Foreign Member Information System to evaluate foreign currency exposure. - Foreign securities held through KSD accounts opened by a local custodian with approved international depositories (examples provided in source). - Extract of settlement model table (as presented): - CCP: KRX | KRX | KRX | KRX | KRX | KSD | - | - - Securities settlement: KSD | KSD | KSD | KSD | - | KSD | KSD | KSD - Cash settlement: BOK-Wire+ | BOK-Wire+ | BOK-Wire+ (except retail bonds) | BOK-Wire+ | Commercial banks | BOK-Wire+ | BOK-Wire+ | BOK-Wire+ - DVP model: DVP3 | DVP3 | DVP3 | DVP3 | - | DVP2 | DVP1 | DVP3 - Settlement day: T+2 | T+1 (T for repos) | T | T+2 | T+1 (T+3 for physical settlement) | T+2 | T+1 | T+2 - Number of members: 61 | 85 | 85 | 61 | 63 | N/A | N/A | N/A ### Legal powers and statutory provisions - Act on Rehabilitation and Bankruptcy of 2007 supports settlement finality and exchange protections. - Deposit Protection Act provides USD 50,000 of protection for each account held in a separate capacity for any financial institution maintaining accounts, including investment brokers and traders. - FSCMA Article 416: FSC can issue orders relative to management of proprietary property and custody of customers’ funds. - FSCMA Article 413: FSC can order suspension of transactions, temporary closing of securities markets, alteration of hours, or other measures if it finds “transactions cannot be normally made” due to natural disaster, warfare, disturbance, sudden and significant change in economic conditions or other incidents. - Act on the Structural Improvement of the Financial Industry allows corrective actions, including provisions for up to six months or more to return to compliance via a financial performance improvement program. ### Supervisory practice and information sharing - FSS reviews off-site reports and material event reports on exchange members that are authorized financial institutions, receives early warning notices and financial inspection results. - Two-way sharing process between FSS, KRX and KSD for managing early warning information and financial fall-out at a member firm is not documented. - No specific program to identify concentrated open exposures or to integrate market and financial information. ### Key comments and policy recommendations - KRX could expand powers over employee traders of members by requiring some form of membership or contractual obligation to follow exchange rules. - Document and make more accessible the actions an FMI can take when a default is declared, including: - Extent to which actions are automatic or discretionary; - Potential changes to normal settlement practices in extreme circumstances; - Management of transactions at different processing stages; - Expected treatment of proprietary and customer transactions and accounts; - Probable sequencing of actions and roles of various parties, including non-defaulting participants; - Existence of other mechanisms to contain default impacts. - Continuously review sufficiency of default management measures. - FSC and FSS should closely monitor operation of newly implemented CNS and intra-cycle trading, test stress assumptions, and determine potential for failed trades to exhaust pre-deposited resources and lending facilities requiring a draw on the common bond. - Keep under review proper allocation of securities to customer accounts and pledging operations and security. - Integrate off-site and on-site financial condition information with market volatility and system liquidity information developed through KRX market surveillance; establish protocols for analysis of systemic risk and cross-sector information sharing. - Increase clarity and accessibility of descriptions of events of default and compensation and redress arrangements. - Accelerate plans to dematerialize all securities. - Reassess the time frame for resolving deteriorating financial institutions where forbearance may be excessive for entities operating in securities and futures markets. *Source: _cr14309 - introduction of false information into the market (Articles 176 and 178). See also the related Enforcement* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14309.pdf_