Major securities firms, suspected of colluding to artificially lower the government bond interest rate, are expected to submit opinions to the Fair Trade Commission within the first half of the year. They argue that they only shared opinions on appropriate interest rates based on market conditions and that such actions are conventional. However, the Fair Trade Commission believes that there was a 'consensus' among companies to align government bond interest rates with a specific level. The consensus is the guideline by which the Fair Trade Commission distinguishes between 'simple information exchange' and 'collusion.'
A strong sanction is expected as the Fair Trade Commission will impose penalty surcharges based on sales rather than profits gained from such actions. However, the situation is complicated by the unprecedented issuance of more than 200 trillion won in government bonds this year. If it is determined that the role of financial firms is essential for distributing government bonds in the market, the penalty surcharge could be reduced during the review process.
According to industry sources on the 28th, securities firms suspected of interest rate collusion are planning to submit opinions denying the allegations to the Fair Trade Commission around May or June. Last year, the Fair Trade Commission launched an investigation into the collusion of government bond interest rates targeting financial firms. Last month, significant suspicion was confirmed among the actions of 15 securities firms and banks, and a review report (similar to a prosecutor's indictment) was sent out. The opinions being prepared by the securities firms are in response to the Fair Trade Commission's review report.
The financial firms in question all became embroiled in the situation while acting as primary dealers (PD) of government bonds. They underwrite government bonds issued by the government and sell them to institutional investors such as pension funds and insurance companies. PDs serve as a bridge between the government and institutional investors. The Fair Trade Commission believes there are strong grounds for legal violations based on actions taken by PDs when purchasing government bonds from the government.
The Fair Trade Commission believes there was an agreement among financial firms to collude on interest rates during the bidding process for government bonds. If the interest rates are raised through collusion, the price of the government bonds will drop. In such cases, the victim is the government, which may either be unable to issue the planned amount of government bonds or have to pay a higher interest rate.
The Fair Trade Commission is confident in proving the allegations of collusion in government bonds, stating that the evidence is clear. Reports indicate that the Fair Trade Commission detected collusion plots among financial firms through forensic analysis. Bond managers from financial firms, particularly those belonging to PD companies, typically have regular meetings facilitated by the Bank of Korea, which leads to active communication between them.
There are discussions that if the Fair Trade Commission bases the penalty surcharges on sales rather than profits, it could reach trillions of won. However, industry insiders estimate it to be at a lower level of 800 billion won.
Financial firms argue that they did not reach any agreements but merely exchanged opinions on market conditions. They also contend that the PD business does not generate significant profits, which eliminates any incentive to collude. In reality, the annual operating profit of a mega-sized securities firm is around 1 trillion won, while the PD business can only yield profit in the tens of billions of won when market conditions are favorable. It is common for them to buy at rates above the market interest rate during government bond bids, resulting in losses.
While financial firms benefit from receiving low-interest loans from the government when purchasing government bonds, this advantage is not substantial compared to the potential business losses. One securities firm official noted, "The PD work is not about pursuing high profits but is primarily about supporting government projects," adding, "It’s closer to a task done for honor rather than making profits."
There are also predictions that the Fair Trade Commission may not wield its authority too freely. This is because the Ministry of Economy and Finance plans to issue government bonds at a record scale of 205.6 trillion won this year. If the Fair Trade Commission imposes penalty surcharges of several hundred billion won on financial firms, the PD's operations will inevitably be stifled.
The final penalty surcharges will be determined during the committee review, which takes place based on the review report and the opinions submitted. It is possible for the penalty surcharge to be reduced by up to 50%. A Fair Trade Commission official explained, "The committee considers economic conditions when deciding on reductions to the final penalty surcharges."