The Financial Services Commission (the “FSC”) released a draft of the Act on Financial Institution’s Issuance of Covered Bond (the “Draft”) on October 24, 2012. After the comment period that ended on December 3, 2012, the Draft is under review by the Ministry of Government Legislation, and is expected to be presented to the National Assembly for legislation and come into effect sometime in the second half of 2013.

Covered bond is a type of bond that (i) has a maturity of 5 years or more, (ii) has prime mortgages and/or assets of similar grade as its underlying assets, and (iii) is backed by the underlying assets.

A summary of the Draft’s main points are as follows:

  • Banks, the Korea Housing Finance Corporation, the Korea Finance Corporation and other similar institutions that have a share capital of KRW 100 million and BIS capital adequacy ratio of 10% are qualified to issue covered bonds;
  • Eligible underlying assets are mortgages with a loan to value ratio of 70% or less, loans to the government and/or public institutions, cash, certificates of deposit with a maturity of 100 days or less, derivative debt instruments for foreign exchange and/or interest hedging, etc.
  • Each financial institution seeking to issue a covered bond must register its issuance plan and underlying assets with the FSC;
  • The maximum issuance amount by a financial institution is limited to a percentage below 8% that is determined in the Enforcement Decree (expected to be 4%) of such financial institution’s total assets as at the end of the preceding fiscal year; and
  • Each issuer must implement risk management measures such as managing the underlying assets separately from other assets, appointing an inspector for independent monitoring, making quarterly disclosures on its website, etc.