THE ONGOING EVOLUTION OF KOREA

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1 Reprinted from Issue 12 September 2009 Investment Management Review A Quarterly Update for the Investment Management Industry THE ONGOING EVOLUTION OF KOREA By Hee-Jin Kim Director, Securities and Fund Services Head Korea Global Transaction Services, Citi

2 THE KOREA SECURITIES INDUSTRY IMR 2

has often puzzled investors both inside and outside the country, but there are many positives in this space. The country boasts a strong base of domestic investors of institutional and asset managers.

3 has often puzzled investors both inside and outside the country, but there are many positives in this space. The country boasts a strong base of domestic investors of institutional and asset managers. Additionally, foreign investors have flocked to own a piece of the world-class companies that drive the economy. However, as the majority of investors will attest, it is not always smooth sailing in this market, but will likely agree Korea is worth it. IMR 3

4 In an attempt to continually enhance and improve its investment industry, regulations in Korea change and evolve from time to time. Additionally, the introduction of new products has given rise to a growing number of investors and brought with it a fresh set of challenges and opportunities. Lastly, for many reasons, market volatility has been a not-irregular feature of the local investment market. All and all, most investors are of the view that Korea is not necessarily representative of the easiest investment environment for investors to navigate. Challenges aside, it is becoming increasingly obvious that the Korean investment market is now too attractive and large to ignore. With each passing year, onshore investors will continue purchasing assets outside of Korea. Thus far this year, signs are already emerging that foreign portfolio investment is picking up in this market, following a sizable drop in the latter parts of 2008 and into the first quarter of All these factors highlight and clearly emphasize the pivotal role played by securities services providers for both domestic outflows and international inflows in Korea. Additionally, investors will continue to make demands on the market knowledge and experience of global securities services organizations to minimize the challenges and take the Korea securities story to the next level. Judging by the major trends in the market, all sides are keen for the evolution to continue in a conspicuously positive fashion. Korea Unmasked To understand the importance of Korea as one of Asia Pacific s major securities markets, the fundamentals of the country must be examined. Economically, Korea has been hit by the global recession, which has dented the confidence of both onshore and offshore investors. However, economic figures published by the Bank of Korea show vast improvements in the past few months. New data point to a 2.3% jump in GDP in the second quarter of 2009, with the country posting its strongest economic numbers for five and a half years. Challenges aside, it is becoming increasingly obvious that the Korean investment market is now too attractive and large to ignore. According to research from the Financial Supervisory Commission (FSC), Korea s securities regulator, all major investment barometers are improving and investors are responding positively. IMR 4

5 Outside of better-than-expected economic growth, other metrics point to a resurgence of investor activity in this market. According to research from the Financial Supervisory Commission (FSC), Korea s securities regulator, all major investment barometers are improving and investors are responding positively. In recent months, capitalization values and trading volume for both equities and fixed income securities in Korea have seen a sizable pickup. For equities in particular, confidence is conspicuously strong, with total capitalization climbing by 24% over the quarter, according to the FSC. Although equity capitalization provides the most robust sign of returning confidence, fixed income capitalization and trading volumes have also seen a surge in recent activity, returning to levels seen pre-crisis. In terms of domestic funds, the numbers also paint an encouraging picture not only for the improvement in the Korean economy but also in the regulatory environment. FSC statistics point out that the drop in number of funds launched is slowing in Korea and assets under management are returning to levels last posted midway through Foreign portfolio investment is also displaying all the hallmarks of a response to a recovering market. Although well down on the peak capitalization of 2007 s third quarter, data from the FSC show that in the second quarter of 2009, foreign portfolio investments, or inflows reversed a predominately downward skid of capitalization drops, rebounding significantly, growing by 18% over the quarter to land at $150 billion. Supporting the Resurgence A strong case for Korea s evolution as a securities market can be made in light of current market conditions. But, as is to be expected, there is some confusion when some of the major changes in regulation are considered. Unsurprisingly, many investors, both foreign and domestic, are turning to their securities services partners to clarify and assist in navigating the constant flux of regulatory changes that have come to characterize the Korean market. IMR 5

6 In 2009, there have been several major market developments that have impacted the securities industry in Korea. There has perhaps been no more supportive regulation introduced in 2009 than tax exemptions for foreign investors for taxes earned on interest and capital gains from Government Bonds and Monetary Stabilization Bonds (MSBs). Under this law, foreign investors are encouraged to invest in Korea through exemptions and attractive repo trade options that can also be arranged with no tax calculation. More confusing for investors, but supportive nonetheless, has been the introduction of new shareholding reporting regulations. From early June, initial 5% reports required for holdings of pure investments have been shortened by trade date plus five working days from the previous period of the tenth day of the following month. This new piece of regulation has impacted investors in terms of monitoring position movements in their own accounts but has also brought new efficiencies to reporting in Korea, bringing investors more in line with other markets. From our experience, investors have also needed certain clarification for new short-selling rules, which have been largely supportive of the securities borrowing and lending space in Korea. In early June, Korea s Financial Supervisory Service (FSS) announced a relaxation of short-selling rules for nonfinancial stocks. Under this new regulation, securities services providers across the board were required to define their investor-clients net long positions for investors placing sales orders to brokers. Investors were also concerned about the impact of this regulation for customized securities borrowing and lending transactions, but through clarifications, have reacted very favorably. The Securities Services Response The aforementioned pieces of regulation have and will clearly support the evolution of the Korean securities industry, but place heavy commitments on the investors themselves. As investors are focusing more on the bottom line, securities services providers are seeing calls on their role to expand to support investor clients. Clearly, the evolution of the Korea investment landscape has prompted a huge response by securities services providers operating in Korea. Some have expanded their presence, some have expanded their services and in the case of Citi, there has been a conspicuous and successful expansion of its commitment to Korea and the Korean securities market. IMR 6

7 Indicative of the desire by more and more Korean securities firms to take advantage of relaxed offshore investing regulations has been the proactive attitude of the Korea Securities Depository (KSD). In its role of providing investment firms with deposit, settlement, transfer agency and auxiliary services, the KSD sought the partnership of securities services providers to enhance its own ability to service offshore investments by Korean firms. Partnering with Citi, KSD crossed a landmark in Korea by providing daily turnaround services for Korean securities firms in Hong Kong and Japan in Through this alliance, KSD has been able to help securities companies better manage independent accounts with their custodian bank. It will also cater to the demands of daily turnaround investment services for foreign currency investments in regional markets, providing investors a new platform to actively manage investment risks. KSD further displayed its commitment to providing additional turnaround services to its end users by extending this platform to the United States. Additionally, related to the recent relaxation on shortselling guidelines, the industry in Korea is bracing for the automation of prematching processes for securities borrowing and lending transactions. Under this new scheme, which Citi has been involved with intimately, securities borrowing and lending participants in Korea will see the elimination of physical certificate delivery for dual market-listed stocks. This breakthrough will ultimately eliminate risks that had existed from physical delivery and thereby shorten the turnaround time for prematching confirmations. The end result of this breakthrough will clearly be felt through more efficiency and confidence in this segment of the securities market. These are clear indications that the Korea securities market is evolving and will continue to do so at a great pace. However, the rate of change understandably means that local market intelligence, technical expertise and experience is required of securities service banks by investor-clients to mitigate the confusion and risks often found in this market. Outside of daily turnaround services, the involvement between the securities services industry and the KSD does not end there. In shoring up securities processes in Korea, asset servicing enhancements including corporate actions information automation have become a major priority for the industry. Through Citi s automated interface with KSD, clients can now receive timely corporate event notifications through elimination of manual paper-based processes by means of implanting automatic electronic feeds. Investors both inside and outside will continue to put Korea firmly on the investment map, but doing it alone will be tough, given this market s ability to transform itself quickly. With international experience and unmatched local experience in Korea, Citi is ideally placed as the most trusted advisor for investors in and out of this dynamic market. Partnering with Citi, KSD crossed a landmark in Korea by providing daily turnaround services for Korean securities firms in Hong Kong and Japan in With international experience and unmatched local experience in Korea, Citi is ideally placed as the most trusted advisor for investors in and out of this dynamic market. IMR 7

8 Global Transaction Services Citibank, N.A. All rights reserved. Citi and Arc Design and Citibank are trademarks and service marks of Citigroup Inc. or its affiliates, used and registered throughout the world. All other trademarks are the property of their respective owners. Citigroup Fund Services Canada, Inc. is a non-bank member of Citigroup. The material in this magazine is for informational purposes only. Information herein is believed to be reliable but Citigroup does not warrant its accuracy or completeness. Information provided herein may be a summary or translation. Citigroup is not obligated to update the material in light of future events. This magazine does not constitute a recommendation to take any action, and Citigroup is not providing investment, tax accounting or legal advice. Citigroup and its affiliates accept no liability whatsoever for any use of this magazine or any action taken based on or arising from the material contained herein. The views expressed by contributing authors may not represent views or opinions of Citigroup or any affiliate. No part of this publication may be reproduced, in whole or in part, without written permission from the publisher GTS /10

Transformation Hedge Funds Remodeled

Reprinted from Issue 11 June 2009 Investment Management Review A Quarterly Update for the Investment Management Industry Transformation Hedge Funds Remodeled By Kevin Lui Director, Citi However we describe