Key Takeaways
- • The Financial Supervisory Service (FSS) ordered tighter prudential oversight of high-interest short-term notes and integrated investment accounts (IMAs) offered by South Korean brokerages, citing rising market rates and potential losses on overseas investments.
- • Outstanding funding from short-term notes at comprehensive investment firms rose from 51.3 trillion won at year-end to 55.9 trillion won at end-June, while IMA balances increased from 1.2 trillion won to 3.6 trillion won, for a combined total of about 59.6 trillion won.
- • The FSS urged firms to stress test liquidity, establish contingency funding plans, diversify funding and investment maturities, and install information barriers between proprietary assets and client funds.
- • The ratio of venture capital supply to short-term note and IMA funding, under a 30% cap, rose from 16.8% in Q1 to 19.5% at end-Q2, with supplied amounts increasing from 9.6 trillion won to 11.6 trillion won.
- • The FSS is jointly preparing Model Guidelines for Corporate Credit Exposure Risk Management with the investment industry and reminded brokers to tightly manage margin lending limits following a temporary collateral-ratio exemption.
Summary
The Financial Supervisory Service (FSS) has moved to tighten prudential oversight of high-interest short-term notes and integrated investment accounts (IMAs) at South Korean brokerages as these products expand. According to the FSS, Seo Jae-wan, assistant governor for capital markets, held a roundtable at the Korea Financial Investment Association with chief risk officers and heads of investment at nine comprehensive investment banks to discuss risk management measures for the two products.
The regulator expects the market to keep growing, noting that two securities firms recently entered the short-term note business and that retirement-pension-eligible products have diversified. Outstanding short-term note funding at comprehensive firms rose from 51.3 trillion won at the end of last year to 55.9 trillion won at the end of June, while IMA balances increased from 1.2 trillion won to 3.6 trillion won over the same period. Seo warned firms to prepare in advance for potential losses in high-risk assets such as overseas investments, amid significant uncertainty in interest rates and stock prices, and urged them to keep newly launched high-interest note products at sustainable levels so they do not strain brokers' financial soundness.
On liquidity, the FSS called for stress tests, contingency funding plans, and close review of recovery plans for long-term assets. Regarding the newly introduced adjusted liquidity ratio, firms were told to diversify funding and investment maturities and improve liquidity response systems. The agency also emphasized improving the quality of venture capital supply, not just its volume. According to the FSS, the ratio of venture capital supply to funds raised via these products, relative to the 30% cap, rose from 16.8% at the end of the first quarter to 19.5% at the end of the second quarter, with the amount supplied increasing from 9.6 trillion won to 11.6 trillion won. Firms were encouraged to identify technology and growth-potential companies that have not yet secured investment, including through a venture capital investment platform whose first commitment case has recently materialized.
On governance, the FSS said it will review internal control systems for both businesses and stressed that comprehensive investment firms should install information barriers to prevent conflicts of interest between proprietary assets and client funds. The regulator is jointly preparing Model Guidelines for Corporate Credit Exposure Risk Management with the investment industry, covering staff expertise and independence standards, corporate financial risk and repayment-plan review criteria, and post-investment credit monitoring procedures. The FSS also reminded brokers that a recently granted temporary exemption from collateral-ratio requirements for credit extensions must not fuel 'debt-fueled investing,' and that margin lending limits must be rigorously managed by stock and by borrower. Brokerage executives said they would reassess investor protection frameworks and incorporate the guidelines into internal rules, while newly licensed firms said they would prioritize soundness and liquidity management.
The regulator expects the market to keep growing, noting that two securities firms recently entered the short-term note business and that retirement-pension-eligible products have diversified. Outstanding short-term note funding at comprehensive firms rose from 51.3 trillion won at the end of last year to 55.9 trillion won at the end of June, while IMA balances increased from 1.2 trillion won to 3.6 trillion won over the same period. Seo warned firms to prepare in advance for potential losses in high-risk assets such as overseas investments, amid significant uncertainty in interest rates and stock prices, and urged them to keep newly launched high-interest note products at sustainable levels so they do not strain brokers' financial soundness.
On liquidity, the FSS called for stress tests, contingency funding plans, and close review of recovery plans for long-term assets. Regarding the newly introduced adjusted liquidity ratio, firms were told to diversify funding and investment maturities and improve liquidity response systems. The agency also emphasized improving the quality of venture capital supply, not just its volume. According to the FSS, the ratio of venture capital supply to funds raised via these products, relative to the 30% cap, rose from 16.8% at the end of the first quarter to 19.5% at the end of the second quarter, with the amount supplied increasing from 9.6 trillion won to 11.6 trillion won. Firms were encouraged to identify technology and growth-potential companies that have not yet secured investment, including through a venture capital investment platform whose first commitment case has recently materialized.
On governance, the FSS said it will review internal control systems for both businesses and stressed that comprehensive investment firms should install information barriers to prevent conflicts of interest between proprietary assets and client funds. The regulator is jointly preparing Model Guidelines for Corporate Credit Exposure Risk Management with the investment industry, covering staff expertise and independence standards, corporate financial risk and repayment-plan review criteria, and post-investment credit monitoring procedures. The FSS also reminded brokers that a recently granted temporary exemption from collateral-ratio requirements for credit extensions must not fuel 'debt-fueled investing,' and that margin lending limits must be rigorously managed by stock and by borrower. Brokerage executives said they would reassess investor protection frameworks and incorporate the guidelines into internal rules, while newly licensed firms said they would prioritize soundness and liquidity management.
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