Settlement process - South Korea

Settlement cycles

Note: Cash market transactions are settled on T+0. However, foreign investors are not allowed to engage in cash market transactions.

Settlement flow

Equities and corporate bonds (settlement between custodian and local broker)

Contractual settlement is not allowed under Korean regulations. Settlements must be posted on an actual settlement date basis.

When a local broker does not receive payment of the relevant cash or securities to settle the trade, the local broker must use their own funds or securities holdings to cover the shortfall in the interim. A local broker that fails either to pay or to deliver securities is considered to be in default by the Financial Supervisory Commission (FSC).

Korean government bonds and monetary stabilisation bonds (settlement between custodian and local broker)

Contractual settlement is not allowed under Korean regulations. Settlements must be posted on an actual settlement date basis.

When a local broker does not receive payment of the relevant cash or securities to settle the trade, the local broker may then use their own funds or securities holdings to cover the shortfall in the interim.

Settlement of off-market transactions

Most bonds and all short-term money market instruments are traded off-market (over-the-counter - OTC) and settlement date for such trades is negotiable between the investor and counterparty (local broker) between T+1 up to T+30 but normally it is negotiated at T+2. Foreign investors should ensure that their local brokers arrange sufficient time (at least two days) for settlement.

Settlement regulations

The Bank of Korea (BOK) and the Financial Supervisory Service (FSS) strictly control both foreign exchange and securities dealing. Many of these controls affect share trading and settlement. Key activities that are not permitted are, as follows:

• Contractual settlement (settlement must occur on an actual SD basis);
• Margin trading (permitted only for individual investors);
• Free delivery of securities to third parties (securities bought in the name of one IRC/LEI holder must be held in this name until sold through the exchange or an OTC trade to another foreign investor);
• Late settlement.

Turnaround (back-to-back) trades

Same-day turnaround trades are allowed only for shares listed on the KRX under the condition that the sale is done following the confirmation of the execution of the buy order. The same settlement cycle applies as for non-linked trades (T+2). The trades must settle with same day value using the same account opened under the same IRC/LEI.

Buy-in/Sell-out

There are two types of settlement in Korea – namely, market settlement (settlement between the exchange and the brokers) associated with buy-in, and institutional settlement (settlement between the brokers and the custodians) associated with sell-out.

In relation to market settlement:

• Where a sales trade keeps failing by SD+2, the KRX itself shall initiate a mandatory buy-in trade between 15:35 Korean time and 15:45 Korean time on SD+2 and close the pending open position.
• In case that a trade fails on SD, which falls on the record date of a corporate action entitlement, the KRX shall initiate a buy-in trade between 17:50 Korean time and 18:00 Korean time on SD in order to avoid settlement failure.
• The KRX's buy-in trade will be settled with T+0 settlement cycle.

Note: The brokers, at their discretion, may charge investors settlement failure fees and delay fees

In relation to institutional settlement:

If a purchase trade does not settle by SD, it is possible to hold the trade until SD+1. If it still has not settled by SD+1, and a foreign investor has not delivered the cash amount to the broker to cover the buy trade by SD+1, the broker may sell the shares at the beginning of the day on SD+2 at the lowest selling price to cover the buy trade, with any loss on the sale borne by the investor.

Registration

Under the regulations of the FSC, all KSD eligible securities acquired by foreign investors must be deposited with the KSD.

The securities are registered in the nominee name of the KSD and re-registration is not necessary.

In case of corporate actions, KSD participants, such as custodian banks, submit details of the beneficial owners to the KSD which submits the data to the issuing companies. Entitlement payments are distributed to the beneficial owners via the KSD and the KSD participants.

Free of payment transfers are only allowed on an exceptional basis (for example, a merger between two IRC/LEI holders). Transfers between different IRC/LEI holders can only be effected by cross-trading in the market.

Investment fund groups and exclusive trading accounts

If a fund manager manages a multiple number of IRCs/LEIs and these IRCs/LEIs are an investment fund group, the fund manager of the investment fund group is allowed to place a bulk order through an IRC/LEI that represents the investment fund group. The fund manager can then distribute the shares of the bulk trade at the average trade-volume-weighted stock price among the IRCs/LEIs after the trade is completed.

Also, fund managers can use an exclusive trading account that is opened in the name of the broker and place bulk orders. To place a bulk order, fund managers must contact their trading brokers directly and pre-notify their intention of using an investment fund group. Documentary requirements to apply for either setting up an investment fund group and using an exclusive trading account may vary from broker to broker.

Payment systems

The Bank of Korea Financial Wire Network (BOK-Wire), the only real-time gross settlement system in Korea, is owned and operated by the Bank of Korea. Participation in BOK-Wire is open to all institutions that are eligible to hold current accounts with the Bank of Korea, such as banks, securities companies, insurance companies, and other related institutions.

BOK-Wire enables participants to transfer domestic currency funds irrespective of the reason for payments. The system also handles the settlement of net positions for retail payments (that is, cheque, bank giro and CD/ATM transactions) and the cash leg of OTC bond transactions on a DVP basis.

All fund transfers are carried out on a real-time, trade-by-trade (gross) basis. Once the fund transfers and settlements have been made, they are irrevocable and unconditional. For erroneous payments, the payer must ask the recipient to carry out an offsetting transaction.

Foreign exchange regulations

Outward payments and remittances in foreign currencies are regulated and monitored by the MOFE and the BOK. Proceeds from the sale of investments may be repatriated freely by IRC/LEI holders. Sales proceeds converted into foreign currencies can either be remitted overseas or held in onshore foreign currency accounts.

KRW can be purchased freely without restriction and are not linked to securities investment. KRW overdraft facilities are allowed under the non-resident omnibus cash account to facilitate the settlement of securities and derivatives products.

Foreign exchange transactions can be routed through any foreign exchange bank. Due to the tight settlement time frame and the penalties resulting from failed trades, the use of a custodian bank for foreign exchange transactions is highly recommended.

Initial Public Offerings (IPOs)

Book building

For an approved issuing company, about three weeks before the subscription date, said issuing company and the lead underwriter are required to announce the book building date in a local daily economic newspaper in order to anticipate the volume of demand and to determine an IPO price. This is the “book building phase” where the IPO price is fixed and IPO shares are allocated to each participant. The results of the book building and general subscription details are announced by the issuing company and the lead underwriter about 2-3 days prior to the subscription date. Brokers may be allocated different IPO share amounts depending on their bidding size during the book building.

The book building period is two days for IPO shares in Korea. Foreign investors have to participate in IPO book building stage directly with the designated broker.

Subscription by foreign investors

Foreign investors can subscribe via one of the brokers who have participated and have been allotted substantial IPO shares. The result of the share allocation will be provided by the broker.

The subscription dates are normally two days for IPO shares in Korea. In most cases, foreign investors are requested to submit the subscription application form on the first day of the subscription period. They may make the submission to the designated broker or via their local custodian bank.

Note: It is not mandatory to submit the subscription application form to the designated broker but it is worthwhile to note that the local broker usually requests to receive the form via the local custodian bank.

Settlement risk

Settlement of IPO shares is not processed in a true RVP environment as the subscription payment must be made prior to the receipt of the shares.

Limitations to subscription

There are three limitations to subscription for investors, as follows:

• Each broker may have their own requirements for eligible subscribers;
• Investors may not be allowed to subscribe above a certain maximum limit;
• Subscription of new shares can only be placed with a single broker, not with multiple brokers.

For more details, investors need to contact one of the underwriters of the new securities.