South Korea: Korean Regulator, Encouraging Financial Institutions By Relaxing The Chinese Wall Regulations

Last Updated: 11 January 2017
Article by Jaehoon Kim, Hyunjoo Oh and Seung-A Hyun

On 28 June 2016, the Korean government enacted an amendment (the "2016 Amendment") to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the "FSCMA") which, among others, expands the exception (the "Wall-Cross exception") to the Chinese wall regulations, i.e., restriction on the communication and exchange of information between business sectors within financial institutions.1 The 2016 Amendment seeks to enhance the competitiveness of financial institutions by allowing them to integrate activities which do not - or are unlikely to - conflict with one another, and further simplifies the regulatory scheme by removing the exceptions to the Chinese wall regulations from the Regulation on Financial Investment Business and incorporating the same in the Enforcement Decree.

In order to facilitate understanding of the aforesaid enactment, we have summarized below the basic structure of the Chinese wall regulations and the status of its implementation in Korea, and conclude with a number of recommendations for compliance officers at financial institutions.

The Basic Structure of the Chinese Wall Regulations

Due to the high likelihood of conflicts of interest in the financial industry, the FSCMA (a) subjects certain business areas to the Chinese wall regulations, (b) prohibits in principle such business areas from sharing information, personnel and/or facilities, and (c) requires strict adherence to a set of Wall-Cross requirements of those business areas seeking to exchange information despite a Chinese wall.

Specifically, FSCMA requires that Chinese walls be erected between, among others, the following business areas (as between (x) and (y)):

  1. Between (x) Proprietary Trading, Dealing and Brokerage, and (y) Collective Investment and Trust Business
    This provision aims to prevent financial institutions from (a) acquiring financial investment products with proprietary and/or client's assets before such products are acquired with the assets held in a collective investment scheme or a clientetstrust, and/or (b) profiting by acquiring financial investment products with the assets held in a collective investment scheme or a client antrust.
  2. Between (x) Investment Banking Business (the "IB business") and (y) Proprietary Trading and Financial Investment (excluding IB business)
    This provision aims to prevent financial institutions from engaging in proprietary trading and/or dealing activities based upon material nonpublic information obtained while engaging in IB business.
  3. Between (x) Prime Brokerage, and (y) Proprietary Trading and Financial Investment Business (excluding Prime Brokerage desk)
    This provision aims to prevent financial institutions from engaging in proprietary trading, brokerage and/or dealings based upon information on the transaction details and investment portfolios of relevant clients (including hedge funds) obtained while engaging in prime brokerage activities.

As a departure from the foregoing, the FSCMA grants the Wall-Cross exception to certain activities for which the likelihood of conflict is perceived to be low. The details of the Wall-Cross exception are beyond the scope of this article.

The specifics of the Chinese wall regulations can be further summarized as follows:

  1. No sharing of information: Departments subject to the Chinese wall regulations cannot share information such as: information on trading or holding of financial investment products, information on the trading details and investment portfolios of clients, material nonpublic information acquired in the course of conducting IB business, information on the portfolio and asset management of collective investment schemes, trusts and/or assets under discretionary management.
  2. No sharing of personnel: Departments subject to Chinese wall must be segregated from each other, and concurrent employment of with multiple departments is not permitted.
  3. No sharing of facilities: Works pace and IT facilities must be segregated to the extent necessary to prevent sharing of information

Further, financial institutions are required to retain internal records of the meetings and communications among the employees who are subject to the Chinese wall regulations and to have such records reviewed by the compliance officer or the auditor.

While the Chinese wall regulations primarily concern the various departments within a single entity, the FSCMA also applies a certain set of rules (i.e., no sharing of information, personnel, and facilities) to the relationship between financial institutions and their affiliates. As such, a global financial institution should take caution that the information exchange and/or communication between its Korean affiliate/branch office and its overseas affiliate/main office do not to violate the Chinese wall regulations.

Relaxing of the Chinese Wall Regulations With a Focus on IB Business

There has been mounting criticism over the rigidity of the Chinese wall regulations which goes against the FSCMA a legislative aim of achieving synergy from integrating various financial services. In particular, there has been recurring criticisms of the impracticality of strictly distinguishing IB business from proprietary trading/dealing/brokerage activities2 given that IB business, for the most part, can be classified as dealing/brokerage activities and often inevitably involve the trading of proprietary assets.

Further, it is difficult to objectively categorize an act based on the purpose of a transaction, which may not be obvious at first glance. For instance, a financial institution may be seeking to acquire privately placed bonds simply for investment purposes, in which case it would constitute proprietary trading, while its service for acquisition of a client would constitute IB business. Similar ambiguity plagues the extent to which a proprietary trading/dealing/brokerage department may handle matters relating to the primary market and the extent to which an IB business department may handle matters relating to the secondary market.3

Accordingly, the Korean regulatory authorities have continually sought to ease the Chinese wall regulations in respect of IB business and to widen the work scope of IB business departments through a line of amendments and statutory interpretations, the most recent of which is the 2016 Amendment. The content of and background to the 2016 Amendment are as follows:

  • The 2016 Amendment allows IB business departments to buy securities issued by KRX-KONEX-listed companies to finance the same and to trade derivatives with KRX-KONEX-listed companies to hedge risk, whereas in the past they could perform such activities only with respect to companies which were not listed on KRX. While such activities are classified as proprietary trading/dealing activities, the 2016 Amendment takes the view that the "financing" aspect of the aforesaid activities is well suited for corporate finance departments.
  • The 2016 Amendment allows corporate finance departments to trade and/or broker "electronic short-term bonds." Previous amendment to the FSCMA also allows corporate finance departments to trade and/or broker government bonds, municipal bonds and special bonds (although such activities are classified as dealing/brokerage activities), the underlying belief being that material nonpublic information concerning such bonds are unlikely to be misappropriated.
  • The 2016 Amendment allows corporate finance departments to invest in certain privately-placed collective investment schemes (although such activities are each classified as collective investment activity and proprietary trading activity). Previous amendment to the FSCMA also allows corporate finance departments to invest in private equity funds as limited partners, whereas in the past they could make such investments only as general partners.

Recommendations in Practice

It is recommended that financial institutions spend a considerable amount of time reviewing and understanding the highly complex Chinese wall regulations before structuring their management schemes. It bears particular emphasis that the Chinese wall regulations are equally applicable to all financial institutions regardless of their size, and provides no exceptions for small branch offices/affiliates of global financial institutions. Although global financial institutions typically have in place well-organized internal conflict management systems (which are oftentimes stricter than the regulatory requirements), special attention should be paid following the reallocation of duties among departments or the introduction of new businesses/products.


1. The term "financial institutions" as used in this article refers to dealers, brokers, fund managers, investment advisors, discretionary investment companies and trust companies (all of which are regulated under the FSCMA) to the exclusion of all other types of financial business entities such as merchant banks.

2. Under the FSCMA, IB business comprises the following: (1) underwriting, (2) arranging public offering and/or private placement in the primary market, (3) brokering, arranging and advising on M&As, (4) arranging and advising on project finances, and (5) managing private equity funds.

3. As IB business activities encompass underwriting and arranging public offering and/or private placement in the primary market, any work relating to the primary market (whether private or public) shall constitute IB business, and any work relating to the secondary market excluding public sales shall constitute dealing/brokerage activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.