The dedicated professionals of Financial Institutions Group
related practice (FIG) at Yulchon LLC will be bringing you periodic
briefings on developments in Korea and globally concerning
derivatives and structured products. We welcome any queries and
feedback on the contents of this Briefing and related
Trade Repository Reporting Proposal Announced
Korean financial regulators announced on 5 July that the 'TR
Working Group' comprising the Financial Supervisory Service
(FSS), Korea Exchange and the Bank of Korea has prepared a 'TR
Reporting Proposal' detailing the entities which will be
obliged to submit reports and details on information to be included
in the reports. According to the TR Reporting Proposal, OTC
derivatives products such as interest rate swaps, currency swaps
and total return swaps would be covered in addition to all
exchanged-traded derivatives products such as KOSPI200 Futures. In
addition, certain derivatives-linked securities such as equity
linked securities (ELS) and derivatives linked securities (DLS)
will also be subject to reporting. All traders registered in Korea
including not only securities companies, banks and financial
institutions but general corporates and individuals will be subject
to such requirements.
Trade Repositories (TR) are being introduced as part of the
global efforts to regulate OTC derivatives market following the
announcement by the G20 at the Pittsburgh summit in 2009. TR is a
financial market infrastructure that collects, manages, and
analyzes data related to OTC transactions. In line with such global
trend, the Financial Services Commission (FSC) and FSS announced
plans to introduce TR in Korea on 17 June 2014 and formed a task
force to conduct a thorough study related to TR from July to
December, 2014. A special committee was formed in July 2015 to
devise detailed qualification standards to be designated as TR
based on the study results and the Korea Exchange was finally
designated as a TR on 17 August 2015.
Korean government to announce relaxation of futures/options
The FSC is expected to announce measures to relax certain rules
concerning futures/options markets with the objective of boosting
the domestic futures/options markets. Expected measures under
consideration include, reduction of basic deposit for
futures/options trading from KRW30million, relax regulations on
submission of ELW price quotes and exemption of transaction tax
(0.3%) on derivative contract for differences of the Korea Post.
Further, introduction of loss limited exchange traded notes and
derivatives trade repositories are expected to be introduced to
enhance stability of derivatives market. A FSC officer mentioned
that "we cannot expect the cash market trade volume and
equities index to rise without a concurrent expansion of the
EU preparation on noncleared OTC margin rules
Following announcement on 9 June 2016 that it will require more
time to approve final technical standards for noncleared OTC margin
rules, ESMA is seeking ways to accelerate implementation of margin
requirements following pressure from both the US and Japan to speed
up the process. There has been concerns among industry
participants that the delayed implementation in Europe in contrast
to the US and Japan where rules are due to come into effect in
September as per the timetable set out by the BCBS-IOSCO will
create an uneven playing field amongst institutions based in Europe
IFRS9 and Structured Notes Business
Starting in January 2018, Korean insurance companies are
expected to account for their assets using IFRS9. Under the
IFRS9, in particular, all structured notes held by insurance
companies must be bifurcated into a bond piece and a structured
swap piece, and the fair-value of the structured swap must flow
through the income statement. This is expected to reduce
Korean insurance companies' demand for structured notes as
fair-value accounting of structured swaps will likely to increase
income volatility compared to marking these at book value using
"hold-to-maturity" accounting. Nevertheless, the
structured notes have been an important option for the Korean
insurance industry as it is trying to manage what has become
historically worst negative-carry problem. Finding an IFRS9
friendly alternative is an important business issue that requires
input from both the product structurers as well as accounting and
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.
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