Korea Capital Market Institute

This article examines the characteristics of special bonds in the Korean bond market and analyzes the surge in Korea Electric Power Corporation (KEPCO) bond issuance in 2022 to assess the impact of a rise in special bond issuance on the bond market. For special bonds, their credit ratings are primarily determined by the potential for government support rather than the issuer’s financial standing. Consequently, special bonds are typically issued with high credit ratings, resulting in lower yields compared to private sector bonds. In addition, they are exempt from the requirement to file a securities registration statement, which significantly streamlines the issuance process and allows for faster issuance compared to private sector bonds. In 2022, when KEPCO’s bond issuance surged, the company primarily relied on bond issuance to raise funds amid substantial operating losses, leveraging the feature of the Korean bond market where special bonds can be swiftly issued at lower borrowing costs. However, as the issuance volume rapidly rose, a serious supply-demand imbalance emerged, forcing KEPCO to issue bonds at higher rates. This, in turn, placed upward pressure on market interest rates and dampened investment demand for private sector bonds, which have relatively lower creditworthiness compared to special bonds. As the expansion of special bond issuance negatively affects private sector bonds, their issuance needs to be effectively and systematically managed. State-owned enterprises have a strong incentive to raise funds through the issuance of special bonds, due to their lower funding costs and simplified issuance process. However, their excessive issuance could disrupt the overall bond market in Korea. To mitigate this risk, it is necessary to ensure that special bond issuance remains at a level that does not adversely affect market stability, while also considering improvements to the issuance system. Meanwhile, starting in 2024, state-owned enterprises in energy sector will see a significant increase in bond maturities. Although these enterprises have moved out of operating losses, but their operating conditions have not improved sufficiently to repay the maturing special bonds. Thus, they need to prepare a refinancing plan that utilizes various borrowing instruments in a balanced manner so as not to affect the bond market.

As the sales of complex and high-risk financial products, such as Hong Kong H-index ELS and interest rate-linked DLF, have increased, the amount of damage to financial consumers due to mis-selling has also risen. Despite substantial financial losses suffered by consumers due to mis-selling by financial companies, recovering damages often involves lengthy processes and high legal fees. In response, major countries like the U.S., U.K., and Japan have introduced various alternative dispute resolution systems to reduce the legal costs and time associated with civil litigation and to support quick compensation. In the U.S., organizations such as the CFPB, FINRA, and AAA provide various forms of financial dispute resolution, including settlement, mediation, conciliation, and arbitration. In the United Kingdom, the Financial Ombudsman Service (FOS), an independent non-profit organization, is responsible for resolving financial disputes. The FOS’s conciliation decisions are unilaterally binding, meaning that once a financial consumer accepts a decision, the financial firm must comply. Additionally, the UK’s Financial Services Compensation Scheme (FSCS) has established a system allowing financial consumers to receive compensation from a pre-established fund if they are unable to recover their investments due to mis-selling or poor advice on funds, structured products, etc. In Japan, each financial industry operates a designated dispute resolution organization. For the financial investment industry, FINMAC handles financial complaints and disputes. FINMAC is independent of the Financial Services Agency and mediates disputes between financial consumers and financial companies related to investment products, crypto assets, STOs, and more. FINMAC’s conciliation decisions are conditionally binding, meaning that if a financial consumer accepts a decision, the financial company must comply. In Korea, financial dispute resolution is managed by the Financial Supervisory Service Dispute Resolution Committee, the Korea Exchange Market Monitoring Committee, the Financial Investment Association Dispute Resolution Committee, and the Consumer Dispute Committee of the Korea Consumer Affairs and Consumer Services Commission. Among these, the Financial Supervisory Service Dispute Resolution Committee plays a significant role in cases involving the incomplete sale of financial investment products. Historically, general financial consumers in Korea have experienced lower compensation rates compared to other major countries, longer compensation times, and lower acceptance of settlement decisions by financial companies. Korea’s financial dispute resolution system is somewhat limited in diversity, operating primarily through dispute mediation. There are many opinions that it needs to be more independent and specialized. Specifically, the Financial Supervisory Service’s Dispute Mediation Committee is inadequately staffed, leading to ineffective dispute resolution. Additionally, the mediation decisions of the FSS are not unilaterally binding, and financial companies often do not accept these decisions. Furthermore, there is no collective dispute settlement system for cases of mis-selling, which limits the ability of many victims to receive appropriate relief. Therefore, it is necessary to improve the Korean financial dispute resolution system to provide quick compensation to financial consumers and reduce legal costs. First, the independence and expertise of the Financial Supervisory Service’s Dispute Mediation Committee should be enhanced, and its staffing and budget should be expanded to strengthen its practical functions. Second, to improve the effectiveness of the financial dispute resolution system, introducing a Japanese-style limited one-sided binding mechanism should be considered. For one-sided binding to be effective, it is essential to enhance the independence and professionalism of dispute resolution organizations and ensure access to justice. Third, the introduction of a consumer protection relief fund system should be considered in the medium to long term to provide direct relief to ordinary financial consumers in financial disputes. Fourth, the introduction of a collective dispute mediation system should be considered to strengthen the relief available to general financial consumers, including the elderly and financially vulnerable.

The repurchase and retirement of treasury shares are key shareholder return policies along with dividend payment. However, listed companies in Korea tend to be reluctant to retire treasury shares, opting instead to hold and utilize them. As of the end of 2022, 67% or more of listed companies held treasury shares, but there were only 54 cases of retirement in 2022, indicating that only 2.2% of all listed companies retired treasury shares. This reluctance is primarily driven by the discretion afforded to listed companies in utilizing these shares. The 2011 amendment to the Commercial Act permitted companies to freely use treasury shares, while it failed to include provisions to prevent companies from abusing treasury shares and undermining shareholder value for the purpose of bolstering their control. Under the current system, companies may hold treasury shares without retiring them and later dispose of these shares to affiliated shareholders with voting rights, particularly for important corporate decisions. Furthermore, companies may circumvent restrictions on the allocation of new shares to a third party by disposing of treasury shares, which results in the equivalent outcome. In cases of corporate spin-offs, treasury shares can be utilized to strengthen control through the allocation of new shares. By contrast, other major economies such as the US, the UK, Germany, and Japan do not recognize any rights associated with treasury shares and provide no regulatory arbitrage regarding the allocation of new shares to third parties and treasury share disposition. This helps prevent the issues observed in Korea. Fundamental regulatory reforms are needed to prevent the arbitrary use of treasury shares and encourage their retirement. Above all, it is crucial to stipulate that treasury shares are not granted any rights, which can prevent companies from exploiting legal loopholes through arbitrary interpretation. In addition, disposing of treasury shares to specific agents, which has the same effect as the issuance of new shares, should be subject to restriction to protect shareholder interests. It is also necessary to adopt measures for shareholders to seek remedies for unfair disposition of treasury shares.

This paper introduces the perspective of foreign investors and intermediaries regarding the market accessibility of Korea’s capital markets. Korea’s capital markets, by quantitative measures, belongs alongside developed markets. However, in major market indices, mainly the MSCI stock market index and FTSE Russell bond market index, Korea is classified as an emerging market. The discrepancy between the quantitative and qualitative aspects of Korea’s capital markets comes from the market accessibility assessment, used by MSCI and FTSE Russell. In both the MSCI and FTSE Russell market accessibility assessments, foreign financial institutions play an important role in providing feedback that is used as input for market classification. To better understand why Korea’s market accessibility is regarded as being below developed country standards, interviews were conducted with major financial firms that invest and intermediate investment in Korea. The group includes global asset managers, banks, custodians, boutique investment banks, hedge funds, market makers, system traders along with ASIFMA and GFMA. The results of the interview reveals that various issues related to market accessibility are interconnected. In particular, areas of market accessibility that Korea falls behind in are not just rules and regulation, but process and practice. Interview participants emphasize that in order to improve Korea’s market accessibility, rules and regulations need to be applied more transparently and consistently. In addition, the most effective measure suggested to enhance Korea’s market accessibility is to improve communication between Korea’s financial regulators and industry with the foreign investor community.

This article addresses the establishment of a regulatory framework for the issuance and distribution of security tokens, positioning it as an essential step in constructing new financial infrastructure, rather than merely introducing new financial investment products. The development of this framework requires a systematic and long-term approach to regulatory enhancement. In this respect, key issues in the security token market can be classified into three primary categories: the securities nature of digital assets, considerations regarding the Act on Electronic Registration of Stocks and Bonds (ERSBA), and matters involving the Financial Investment Services and Capital Markets Act (FSCMA). For each category, both short- and long-term development strategies can be proposed as follows. First, regarding the securities nature of digital assets, a regulatory gap persists in addressing unfair trading in the virtual asset market, particularly before the implementation of the Act on the Protection of Virtual Asset Users (Virtual Asset Act) on July 19, 2024. To fix this gap, the securities nature of virtual assets should be strictly assessed, especially in cases where market trust is compromised by unfair trading practices. Based on such assessments, it is necessary to impose sanctions on digital asset issuers who circumvent disclosure requirements and unfair trading regulations under the FSCMA. After the Virtual Asset Act takes effect, emphasis should shift toward a self-regulatory framework for assessing the securities nature and establishing specific guidelines for determining whether digital assets are securities or commodities. If the procedures for assessing the securities nature of digital assets are institutionalized, it will clarify the regulatory jurisdiction of the FSCMA and the Virtual Asset Act, thereby enhancing market predictability. Second, as for the ERSBA’s application to security tokens, a proposed amendment to the ERSBA, which primarily aims at granting presumption of rights to distributed ledgers, should be promptly passed by the National Assembly. Over the long term, regulatory reforms should recognize the innovation and effectiveness arising from payment method tokenization as well as the tokenization of securities. Lastly, in terms of the FSCMA issues related to security tokens, the proposed amendment to the FSCMA, which seeks to establish a new regulatory framework for the distribution of atypical securities and over-the-counter (OTC) brokerage services, should also be passed swiftly by the National Assembly. For long-term regulatory improvement, unified regulatory principles should govern various OTC trading platforms for security tokens as well as traditional unlisted securities under the FSCMA. Moreover, it is worth considering relaxing or abolishing overly restrictive sales regulations to facilitate OTC transactions.

This report analyzes the long-run causal relationship between the stock market and economic growth in OECD countries, including South Korea. Using stock market size, depth, liquidity indicators, and a vector error correction model, this report estimates the long-run causality of each indicator on GDP. According to the empirical analysis, one or more stock market indicators show a positive long-run causality on GDP in Korea, Australia, Belgium, Spain, and Mexico. In particular, the real market capitalization and turnover exhibit a positive long-run causality in Korea, implying that the increase in the stock market size and liquidity has a positive impact on the real sector. The positive long-run causality of stock market indicators on GDP tends to be observed mainly in countries with a significant increase in financial openness. What is notable in Korea's case is its significant increase in the number of listed companies per capita compared to other countries studied. Based on the findings, an additional analysis is conducted, assuming that Korea's stock market affects capital accumulation through listings. The results show that the path has a significant impact. In summary, the analyses in this report find that the real market capitalization and turnover have a positive long-run causality with the number of listed companies, while the number of listed companies has a positive long-run causality with capital stock. These results suggest that the increase in the stock market size and liquidity could facilitate more firms to go public, subsequently promoting capital formation and thereby having a positive impact on the real economy. The empirical results in this paper imply the need for continuous efforts to develop the stock market, which could play a role in driving the growth of the real economy. Korea's stock market faces several challenges that require structural improvements, such as enhancing shareholder value, improving corporate governance, and establishing a long-run investment culture, among others. It is necessary to address the structural issues in order for the stock market to serve as a solid growth driver for the real economy. This will require not only the efforts of firms and investors, but also institutional improvements and policy support to ensure consistent implementation of these efforts.