Tuesday, July 26, 2011

Goldman Sachs-style IB to be created

The government is setting up the legal grounds for the creation of Goldman Sachs-style global investment banks in Korea and alternative stock exchanges.

A revision bill to the Capital Market Law will encompass the creation of alternative trading systems (ATS) that would break the monopoly of the Korea Exchange (KRX); the prohibition of “shadow voting” or the proxy exercise of voting rights; and tougher regulations to protect investors.

The revision will be reviewed by the Regulatory Reform Committee and the Ministry of Government Legislation before being submitted to the National Assembly in October.

The biggest change the bill could bring to Korea’s financial industry is the birth of big investment banks (IBs), which the Financial Services Commission (FSC) defines as “comprehensive financial investment companies.”

Securities firms would qualify if their equity capital reaches 3 trillion won or above, provided they have adequate risk management capacity.

“Considering the revision will allow them to provide prime brokerage services, the minimum requirement for equity capital will start at 3 trillion won, while the amount will go up if the businesses expand,” the FSC said in a statement.

The 3-trillion-won requirement could pose a challenge to domestic securities firms for now.

According to data compiled by Hi Investment & Securities Analyst Kim Ji-hyun, Daewoo Securities has the largest amount of equity capital at 2.86 trillion won, followed by Samsung Securities with 2.8 trillion won, Hyundai Securities with 2.67 trillion won, Woori Investment & Securities with 2.63 trillion won and Korea Investment & Securities with 2.42 trillion won.

Some of the large Korean brokerage houses have already shown strength in traditional investment banking roles, including managing initial public offerings (IPO) and mergers and acquisitions (M&A). The government wants them to explore riskier areas including prime brokerage services.

These generate most of their income from lending securities to hedge funds for shorting, or short-selling, which involves borrowing stocks and selling them with the expectation their prices will fall in the future, and then buying and returning the same shares when prices fall.

The IBs will also be allowed to settle orders internally without going through the stock exchange.

The revision would also permit the creation of ATSs that could, in theory, compete against the Seoul bourse to bring down trading fees and strengthen the KRX through competition amid mergers of overseas bourses.

With licensing from the FSC, the ATSs would be able to settle and clear orders, but not list companies or regulate the market.

When the size of orders reaches a certain level, the ATSs will have either to pass on the orders to the KRX or ask the FSC to give them a permit that would turn them from a trading system to a stock exchange.

“Such a permit, however, would be rarely given,” an FSC official said.

Once an ATS becomes a stock exchange, it will be able to list companies and regulate the market.

The FSC said that 84 ATSs are operating in the U.S., 26 in Europe and some 20 in the rest of the world including Asia.

An ATS operator is expected to have equity capital of at least 50 billion won, and an investor would be allowed to own up to 15 percent of the assets to be traded by it.

Furthermore, regulations for investor protection are strengthened in the revision. Manipulating stock prices by abusing non-listed securities and over-the-counter (OTC) derivatives will be punished if underlying assets are listed securities.

With regard to insider trading, investors, who receive inside information second-hand, will be subject to fines for disturbing the market order. In the past, only those who obtain information directly from insiders were punished.

Additionally, scalpers ― retail investors specialized in high-frequency trading ― will be regulated.

source: The Korea Times

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