Market infrastructure – South Korea
Institutions and organisation
Korea Exchange – KRX
The Korea Exchange (KRX) was launched on 27 January 2005 and was created through the integration of the Korea Stock Exchange (KSE), Korea Securities Dealers Association Automated Quotation trading board (KOSDAQ) and the Korea Futures Exchange (KOFEX). KRX is the operator of Korea’s securities and derivatives markets under the "Financial Investment Services and Capital Markets Act" (FSCMA).
The KRX is a self-regulating organisation supervised by the Ministry of Economy and Finance (MOEF) and the Financial Supervisory Commission (FSC), see “Regulatory structure” below.
The KRX is responsible for:
- Maintaining a fair and orderly market;
- Regulating and supervising member firms;
- Setting listing requirements;
- Monitoring securities;
- Enhancing activities approved by the MOEF;
- Regulating corporate disclosure.
The KRX monitors the trading activities to prevent price manipulation, insider trading and other acts of malpractice. If anything suspicious is detected, the KRX may conduct in-depth investigations and order the member firm in question to submit any documents or material required. The exchange may exercise a range of disciplinary actions depending on the severity of the case including warning, suspensions or cancellations of the membership.
Trades on the KRX are executed by its member securities firms.
The South Korea market is a typical order-driven market, where buy and sell orders compete for best prices without a specific market maker. Bids and offers received from many and unspecified traders are executed according to established auction principles.
The full trading procedure, from order placing and receiving, order matching and execution, through to trade confirmation, is fully automated. This ensures that all orders are processed accurately and without delay. After an order has been executed, the KRX member that submitted the order validates the details (issue, quantity and price) of the executed order and confirms that the details match the input order. If no error is found, the member determines the amounts of the payment and of the securities to be collected on the settlement date according to the confirmed details.
Korea Securities Depository (KSD)
The KSD was established in 1974 as the central depository for South Korea and the clearing and transfer agent for listed companies. Securities companies and other financial intermediaries are required to open accounts and deposit their securities with the KSD.
The KSD is also the paying agent for income and is authorised to exercise voting rights according to instructions from beneficial owners.
The KSD is owned by the KRX and 56 financial institutions. There are over 1,600 KSD participants that include securities firms, banks, insurance companies, pension funds, investment trust companies and other corporations.
It is mandatory to settle all trades effected on the KRX through the KSD. The KSD runs a book-entry system called Institutional Settlement (InSet) System where securities are cleared on a gross basis and cash is cleared on a net basis through the participants' clearing accounts with the KSD.
Over 90% of shares and bonds are dematerialised within the KSD. All foreign investors are required to hold their securities in safekeeping with the KSD by regulation.
Institutional Settlement System (InSet)
InSet is administered by the KSD and operates a book-entry clearing system for securities listed on the KRX and as well as those traded via the KOSDAQ. This system involves the electronic transfer of securities.
Bilateral netting of cash and simultaneous settlement of securities
In case of equity trade settlement via InSet, the settlement is processed under BIS model 2 where securities are settled intraday on a trade-by-trade (gross) basis starting from 9:00 KRT and cash is settled through BOK-Wire, via the local KSD participant’s BOK cash account, on a bilateral net basis from around 16:00 KRT on settlement date, with the final transfer of cash from the buyer to the seller occurring at the end of the processing cycle.
In case of bond trade settlement via InSet, the settlement is processed under BIS model 1 where both bonds and cash are settled simultaneously on a trade-by-trade (gross) basis, with final transfer of securities from the seller to the buyer occurring at the same time as the final transfer of cash from the buyer to the seller.
Securities are kept in dematerialised (commingled) form.
Foreign investors are required to deposit all KSD-eligible securities in the KSD.
KSD-eligible instruments
- Listed securities (equities and bonds)
- Unlisted securities, including those that have been delisted (equities and bonds)
- Collective investment securities
- Derivatives linked securities
- Depositary receipts
- Short-term instruments (commercial papers, certificates of deposit)
- Shares and warrants issued by the rights exercise on deposited shares
- Other securities, as deemed appropriate by the KSD
Shares held in the KSD are registered in the name of the KSD as nominee.
Central bank – the Bank of Korea (BOK)
The BOK was established on 12 June 1950 under the Bank of Korea Act. Its main purpose is the pursuit of price stability. In addition, it performs the typical functions of a central bank: issuing bank notes and coins, formulating and implementing monetary and credit policy, serving as the bankers’ bank and as the government’s bank. The BOK also operates the payment and settlement systems, manages the foreign exchange reserves and exercises certain bank supervisory functions.
Regulatory structure
The securities market in Korea is supervised by the MOEF and the FSS.
Ministry of Economy and Finance (MOEF)
The MOEF controls and directs the Korean securities market by setting overall policy. It is primarily responsible for the interpretation of securities laws and authorisation and revocation of licences for financial institutions.
Financial Services Commission (FSC)
The FSC, established in 1999, is responsible for the implementation and amendment of supervisory rules and the inspection and examination of financial institutions. The FSC is a consolidated regulator for the securities, banking and insurance industries. Although nominally under the jurisdiction of the Prime Minister, the FSC performs its duties independently of the Prime Minister and other government departments.
The Financial Supervisory Service (FSS)
The FSS, established in January 1999, it is the executive arm of the FSC. The FSS' main objectives are to ensure sound and fair trading practices in the Korean financial markets. It is also responsible for granting Investor Registration Certificates.