The Financial Supervisory Service (FSS) is set to inspect the issuance note business risks of major securities companies. Considering these risks, the FSS plans to improve the method for calculating the Net Capital Ratio (NCR) and manage redemption risks in short-term funds like money market funds (MMFs).
On the 24th, the FSS held a briefing session on the supervision and inspection tasks in the financial investment sector, attended by approximately 270 participants from securities firms, asset management companies, real estate trusts, and the Korea Financial Investment Association.
In an opening address, Seo Jae-wan, Deputy Governor of the FSS’s Financial Investment Sector, highlighted the challenges posed by market volatility due to global economic uncertainties last year. He emphasized refining liquidity regulations and overhauling the capital adequacy regulatory system to enhance responsiveness to market shocks.
Given the potential for increased market volatility due to changes in U.S. policies, he stressed the importance of proactive management of key risks like real estate project financing (PF) defaults and short-term market instability.
To prevent the reoccurrence of illegal and unhealthy business practices, swift and efficient supervision will be pursued through impromptu and mobile inspections. Industry issues concerning internal controls will be regularly shared with the sector via CEO letters to encourage voluntary improvement.
The session comprised two segments: the first featured presentations by industry experts on capital market issues and a Q&A session explaining the FSS’s supervisory and inspection directions; the second involved a roundtable discussion with participants offering suggestions on these directions.
One of the first items on this year’s agenda is the improvement of NCR calculation methods and the introduction of liquidity management tools (LMT) for open-ended funds to preemptively manage “fund run” risks. The goal is to reflect various funding sources of securities firms, like issuance notes, into the NCR more appropriately. The FSS also plans to evaluate the business status and potential risks related to these issuance notes.
Furthermore, to strengthen liquidity capabilities, the FSS will routinely inspect securities firms’ liquidity status and refine the liquidity regulatory framework by incorporating risks like contingent liabilities and sudden market freezes. Risk level-specific financial soundness and project management will be reinforced through analysis of land trust risks.
From an inspection perspective, the FSS will conduct connected inspections of underwriters, asset managers, sales agents, and affiliated securities and asset management companies to check for unlawful activities and risk management adequacy. The focus will be on activities that could harm investor interests during IPOs, unhealthy practices in the bond market, and gray areas in internal controls.
The FSS will also scrutinize central branches of securities firms following some high-net-worth individuals gravitating toward these branches due to recent efficiency measures. They will check compliance with sales procedures in the booming high-risk corporate bond market and assess if there’s excessive concentration in proprietary investments.
Based on inspection results, significant internal control issues will be communicated to CEOs directly through FSS letters. Consulting services will be offered to ensure the effective implementation and monitoring of the new accountability structure starting in July.
Additionally, the FSS aims to bolster the capital market’s competitiveness by developing systems to prevent illegal short-selling and support the establishment of infrastructure like an Alternative Trading System (ATS). Supervisory measures are being reviewed to ensure the smooth implementation of regulatory systems for token securities (STOs).
The FSS plans to pursue phased inspections and disclosure strategies to fulfill asset management companies’ fiduciary responsibilities, such as preparing a comparative disclosure system for exercising voting rights.