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.
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 markets rules
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 derivatives market.
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 and US/Japan.
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 fairvalue 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 legal professionals.