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 topics.
IFRS9 and KRBC Management for Insurance Companies
The requirement for Korean insurance companies to account for their assets using IFRS9 from January 2018 is likely to raise capital-related issues for foreign-owned insurance companies in Korea due to the obligation to comply with Korean risk-based capital requirement (KRBC) for its Korean operations whilst complying with risk-based capital or solvency requirements of its head office’s jurisdiction where the two rules are not harmonised.
Significant portion of outstanding life insurance policies have an expected life of 50-years or longer. Insurers which guaranteed a fixed return of 5% for the duration of such policies are faced with such obligations in a near-zero interest rate environment. Purchasing 50-year Korean Treasury Bonds (KTBs) paying 3-4% fixed interest would appear to be a sensible way to match the liabilities but the different capital treatment of such assets by KRBC and Solvency II (in Europe) poses a problem. Purchasing 50-year KTBs would mean lower capital requirements under Solvency II but in contrast raise the requirement under KRBC as 50-year KTBs would be regarded as excessive of what is required and thus increase the capital that is required. Finding a strategy to comply with two distinct capital-requirement regulations require product expertise combined with thorough understanding of relevant regulations.
Update on Non-Cleared OTC Margin Rules Implementation
The requirement for posting margin for non-cleared OTC derivatives transactions have come into force in the US and Japan as of 1 September as per the timetable set out by the BCBS-IOSCO.
However, following the announcement by ESMA in June that implementation in the EU will be delayed until next year, the Australian Prudential Regulation Authority (APRA), the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) made announcements on 22 August also deferring the implementation of the margin requirements beyond the proposed September 1 commencement date. APRA announced a deferral in implementation, and will finalise new standards in the near future, with no commencement date set at this stage. The MAS indicated that it would issue final rules in the coming months and would announce a revised phase-in schedule in due course. The HKMA released conclusions to its consultation and will issue final rules in the coming months.
In the meantime, ISDA and IHS Markit have launched ISDA Amend 2.0, which allows market participants to implement the new margining requirements for non-cleared derivatives, as well as the ability to inform counterparties about elections they have made under the ISDA Resolution Stay Jurisdictional Modular Protocol.
Central Counterparties (CCPs) – Consultations
Two consultations on central counterparties (CCPs) were launched in August 2016.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published their consultation on financial risk management and recovery planning for central counterparties (CCPs). Topics covered include: CCP governance, stress testing, coverage, margin, CCP contribution to losses, and recovery. The deadline for response is 18 October 2016.
The Financial Stability Board (FSB) also published a consultation on CCP resolution principles. Topics covered in the consultation paper include: objectives of CCP resolution, resolution strategies, timing of entry into resolution, adequacy of financial resources in resolution, tools to return to a matched book, allocation of losses in resolution, non-default losses, application of the ‘no-creditor-worse-off’ safeguard, equity exchange in resolution, cross-border cooperation, and cross-border effectiveness of resolution actions. Responses are requested by 17 October 2016.
FSS Calls for Enhanced Risk Management of Derivatives-Linked Securities
FSS Governor Zhin Woong-Seob held a meeting with heads of trading and risk departments of the 8 largest securities companies on 25 August. Governor Zhin pointed to the near fivefold growth of the derivatives linked securities market since its inception in 2003 exceeding 100 trillion Won in July 2016 which has been accompanied by increase in market risk due to securities companies hedging such risks by itself. He asked that the securities company enhance their risk management system and the effectiveness of the monitoring functions of their risk departments and mentioned that the FSS is considering a number of measures to enable investors to make informed investment decisions such as introduction of a ‘cooling-off’ period during subscription period.