The government is moving to improve regulations to support the active overseas expansion of securities firms and corporate finance. It will lower the risk value of the net capital ratio (NCR) to encourage aggressive business activities at overseas local subsidiaries and abolish the concentration deposit requirement for securities firms' foreign currency securities. The government will also promote strengthening the soundness management of derivative-linked securities and bonds.
On the morning of the 9th, the Financial Services Commission held a meeting with the CEOs of 10 investment corporations, chaired by Chair Kim Byeong-hwan, at the Korea Financial Investment Association in Yeouido, Seoul, and announced the 'Measures to Enhance Corporate Finance Competitiveness in the Securities Industry.'
Financial authorities have decided to provide incentives to encourage securities firms' overseas expansion. Currently, the revenue proportion of domestic securities firms’ overseas branches is only 4.1%. The government has decided to recognize cash reserves retained by overseas subsidiaries as liquid assets when calculating the three-month liquidity ratio (liquid assets ÷ liquid liabilities).
In addition, if overseas local subsidiaries invest in stocks included in country representative indices with investment-grade ratings (BBB or higher), the individual risk value of the net capital ratio (NCR) will be reduced from 12% to 8%.
Improvements in regulations concerning securities firms belonging to bank holding companies will also be promoted. In addition to the NCR ratio regulation, securities firms under bank holding companies are also subject to consolidated Basel International Settlement Bank (BIS) ratio regulations. Thus, even if the NCR risk value is low, a high BIS risk value makes active investment challenging.
The Financial Services Commission has decided to review improvement measures so that the characteristics of the securities industry can be reflected in the calculation of the consolidated BIS ratio of bank holding companies, without deviating from Basel international standards. Specific improvement details will be finalized and announced in the third quarter after further review by the banking soundness regulation improvement task force.
The obligation to concentrate deposit foreign currency securities held by securities firms will also be abolished. Currently, securities held by firms’ proprietary and investor parts must all be deposited at the Korea Securities Depository for safe custody and legal rights protection, while foreign currency securities must be stored in accounts under the custody of overseas depositories. However, this restricts the use of securities for collateral provision.
Accordingly, the government has decided to allow securities firms to hold foreign currency securities in accounts under their names at overseas depositories so that they can freely utilize them for foreign currency financing, etc.
The prime brokerage services (PBS) targeted at investment firms will also be expanded. PBS refers to services such as asset management, securities lending, and total return swaps (TRS) provided to institutional investors such as funds. Currently, investment corporations with over 3 trillion won in equity can carry out dedicated brokerage services for funds, private equity funds (PEF), foundations, and pension funds.
The government will also improve the ability to perform dedicated brokerage services for venture capital (VC), real estate investment trusts (REITs), and new technology cooperatives, which are not classified as funds (collective investment institutions) under the Capital Market Act but are substantially similar.
In addition, financial authorities plan to gradually limit the internal lending limit for derivative-linked securities and bonds to 20% in 2026 and 10% in 2027 to strengthen soundness management.
On that day, the government stated it will strengthen the soundness management of securities firms in real estate, expand and improve liquidity ratio regulations, and also overhaul the NCR system for medium- to long-term investment firms. First, it will reform the current system of calculating the NCR risk value based on investment forms such as debt guarantees and loans in relation to real estate to reflect practical risks such as the progress stage, loan-to-value ratio (LTV), and whether there are sales or guarantees. Moreover, it will establish new regulations for real estate total exposure limits, expanding the debt guarantee limits (100% of equity).
The liquidity ratio regulation, which is currently applied only to investment firms and derivative-linked securities issuers (22 firms in total), will be expanded to all securities firms, and the calculation method will also be improved to reflect debt guarantees and asset price fluctuation risks. More detailed information will be finalized and announced in June.
The government noted that most of the follow-up measures to enhance the competitiveness of corporate finance in the securities industry are amendments to enforcement regulations and rules. They are expected to be announced in the second quarter of this year, with plans to complete amendments within the year.