ole of supervisors at early stage of apital market development

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1 ole of supervisors at early stage of apital market development ong-hwan Kim ommissioner ecurities and Futures Commission inancial Supervisory Commission arch 2, 2007

2 Contents. Challenges of Capital Market in Developing Countries. Evolution of Korean Capital Market. Government Policies at Early Stage. Use of IT in Capital Market Supervision. Implications to Supervisors in Developing Countries

3 Objective Provide role of supervisors at early stage of capital market development Review and assess capital market development in Korea, focusing on the early stage Derive implications from Korea s experience

4 Ⅰ. Challenges of Capital Market in Developing Countries Financial system: Heavily bank-dependent Market performance A few number of listed firms and inactive IPO and secondary offering Sporadic issuance of corporate bonds Thin trading volume

5 Ⅰ. Challenges of Capital Market in Developing Countries Market regulation Government regulated exchange market Weak government regulatory body and self regulation Market players Non-transparent, family-owned corporate sector Lack of competent industry Largely uneducated investors Highly conservative institutional investors

6 Ⅰ. Challenges of Capital Market in Developing Countries orea s capital market in 1970s was primitive GDP per capita (USD) Number of listed firms IPOs (USD Millions) Market Cap. (USD Millions) Korea 1) (1970S) ,447.5 Other developing countries (2005) Indonesia Philippines Sri Lanka Vietnam 1, , , , , , ,500 Trading Volume (USD Millions) 1, , , ,720.0 ) Annual average of

7 Ⅰ. Challenges of Capital Market in Developing Countries Korea s Experience Government recognized the value of capital market in the economic development process and implemented ambitious capital market development policies However, trial and errors have been unavoidable Government bond crisis (1958) Stock exchange scandal (1962) Construction share crisis (1977) Financial Crisis (1997) Capital market has been reformed during the crisis and afterwards

8 II. Evolution of Korean Capital Market Market Growth by development stages (bill.won) 700,000 (companies) , , ,000 2nd Stage 3rd Stage Implemented OTC market vitalization measures Allowed foreign direct 4th Stage Opened futures market Established an Integrated market by combining stock market, venture market & future market , ,000 1st Stage Enacted Securities Exchange Act Enacted IPO Promotion Act Established Securities Supervisory Authority Established Korea Fund investment Market Cap ,000 Listed Companies

9 II. Evolution of Korean Capital Market owth of Economy and Capital Market by velopment Stages age st age rd age nd age th age Growth rate 8.4 (4.1) 7.4 (6.3) 9.6 (9.5) 3.1 (0.5) Economy GDP per capita (USD) (608.0) 1,723.3 (2,366) 6,261.4 (11,471) 11,623.2 (16,306) GDP (USD Millions) 8,582 (21,000) 63,900 (97,000) 287,400 (517,000) 548,200 (788,000) Number of Listed companies 58 (189) 334 (342) 603 (721) 715 (702) Market Cap. (USD Millions) (1,892.7) 4,924.2 (7,380.8) 110,900.2 (182,201) 250,474.7 (646,667.9) Capital Market Korea Stock Index 41.8 (79.8) (138.7) (934.9) (1073.6) ): end of stage 2) Korea stock index: =100 3) 1 st stage: 1968~1975 Trading Amount (USD Millions) (689.9) (4,067.2) 119,932.3 (184,476.7) 445,254.4 (776,167.7) Issuanc e of Stocks 3) (USD Millions) 66.5 (253.7) (319.7) 6,694.4 (8,088.9) 10,912.7 (6,625.6) (annual avera Issuanc of Bond (USD Millions 17.8 (69.1) 1,578.5 (3, ,516. (30, ,711. (

10 Ⅲ. Government Policies at Early Stage Promoting listing Introducing securities savings program Sponsoring market intermediaries Setting up a separate securities supervisor Encouraging corporate bonds issuance Liberalizing capital market

11 Ⅲ. Government Policies at Early Stage Promoting Listing Government selected IPO target companies Tax benefits were given to IPO companies Contributed to expansion of capital market by supply side

12 Ⅲ. Government Policies at Early Stage Securities Saving Program Securities companies received small deposits from individual investors and laborer, which was invested to stock market Tax benefits were provided to those small depositors Saving period and saving ceiling was set up in advance Increased stock demand and contributed to laborer s wealth accumulation and awareness of equity culture

13 Ⅲ. Government Policies at Early Stage Sponsoring Market Intermediaries Government established Korea Public Investment Corporation (KPIC) with the business allowance of IB, brokerage & dealing KPIC was assessed to accomplish a significant role of implementing government securities policy and converted to Securities Supervisory Authority in 1977 KDB established KDB securities specializing in bond trading and international business

14 Ⅲ. Government Policies at Early Stage Setting up a separate securities supervisor Government established SSC and SSA for effective supervision of the securities market including investors, listed company and securities companies Seeked for efficiency, fair trading and protection of investors in capital market Enhanced financial soundness of listed companies Enhanced managerial efficiency and ethics of securities companies and related organization Contributed significantly to the development of capital market

15 Ⅲ. Government Policies at Early Stage Encouraging corporate bond issue Versatile kinds of corporate bond was allowed to be issued Diversified issuing scheme of corporate bond was allowed Committee for optimal issuance and allocation of corporate bond was established Contributed to the corporate funding and development of bond market

16 Ⅲ. Government Policies at Early Stage Domestic firms were permitted to issue CBs and BWs in the overseas market Blue print for capital market liberalization Step by step opening strategy was taken Initiative stage was allowance of inbound indirect investment Various indirect vehicles for foreigners to invest in Korean securities, such as through trust funds have been permitted Korea fund was subsequently established Korea-Euro Fund was set up Next stage was allowance of domestic firm s overseas funding

17 Ⅲ. Government Policies at Early Stage Last stage was foreign securities company s business allowance in Korea and inbound direct investment Foreign securities company was allowed to do business in Korea Foreigner s direct investment in Korea securities was permitted with some limitations, aggregate ceiling of 10% and individual ceiling of 3% of a company s outstanding Foreigner s investment limit have been reduced gradually

18 Ⅳ. Use of IT in Capital Market Supervision IT is especially relevant in the financial industry One of the first sectors to use computer services on a large scale Taking off as early as 1980 s: electronic transfers, ATM Machines, automatic accounting system, other automated back office services Serve to keep abreast of global market Provide instantaneous services to customers

19 Ⅳ. Use of IT in Capital Market Supervision IT contribute to overall productivity via its large contribution in finance During in US economy, IT is the most important contributor to the growth via economic process of delivering output from computer and data processing services to the finance sector (Lawrence Klein, Nobel Literate, Pennsylvania University

20 Ⅳ. Use of IT in Capital Market Supervision IT is also very important in securities market supervision Real time surveillance Increased public access Significant reduction in supervision/disclosure related cost

21 Ⅳ. Use of IT in Capital Market Supervision orea s use of IT in Financial Supervision FSS System) 1 Financial Information Exchange System (FINES) 2 Office Automation System (OAS) 3 Home Page System ( 4 Intelligent Supervisory Information System (ISIS) 5 Data Analysis Retrieval and Transfer System (DART) Increased Accessibility Improved Efficiency in Supervision Real-time Surveillance

22 Ⅳ. Use of IT in Capital Market Supervision 1 Financial Information Exchange System (FINES) Basis for IT supervision system Collect data via internet currently receives 1,700 kinds of fillings from more than 1,000 financial institutions on daily/weekly/monthly basis Significant reduction in supervision/disclosure related cost 2 Office Administration System (OAS) Launched in 1999; updated in 2002 Electronic signature, communication, information sharing etc.

23 Ⅳ. Use of IT in Capital Market Supervision 3 Home Page System ( 8,000 viewers daily 50,000 civil appeals via internet submission in 2005 (82.5% of total) 4 Intelligent Supervisory Information System (ISIS) Web-based financial supervision information system Integrated by 6 supervision functions; supervision, examination, investigation, consumer protection, management, others

24 Ⅳ. Use of IT in Capital Market Supervision 5 Data Retrieval, Analysis and Transfer System (DART) World s thirdly developed electronic disclosure system (Next to US and Canada) DART is in full operation Since 2001; Paper filling is no longer needed! English version of DART launched in February 2007 With DART, it is estimated that more than 400 billion won is saved annually thanks to reduction in supervision/disclosure related costs

25 Ⅴ. Implications to Supervisors in Developing Countries Role of supervisor is significant, especially in the allocation and pulling limited national resources during the early stage of economic development Supervisor needs to expand supply and demand of capital market in the early stage Promote listing of government owned companies and private companies Develop institutional investors and individual saving programs Government sponsored market intermediary may be needed at early stage of capital market development As market grows, the need of government sponsoring reduces and market replaces the role of government

26 Ⅴ. Implications to Supervisors in Developing Countries As market opens and advances, supervisor needs to focus on prevention of systemic risks and protection of investors against market abuses As economy grows up, role of supervisor needs to be reformed to emphasize fairness and investor protection Securities supervisory institution is established Disclosure rule & regulation of inside trading is strengthened More refinded regulatory framework such as functional regulation is needed Regulatory guideline such as risk based supervision is recommended

27 Ⅴ. Implications to Supervisors in Developing Countries Use of IT in securities market supervision is also an very important factor in capital market development Better access to supervisory policy Enhance transparencies reduce uncertainty in decision making of market participants conducive to good policy making Financial and and Systematic Stability

28 Thank you!

Insurance Statistics Information

Insurance Statistics Information in Financial Supervisory System of Korea 26 27 January 2012 Jang, Seung-Rok Contents Ⅰ. Ⅱ. Ⅲ. Ⅳ. Outlook of the Korean Insurance Industry Financial Supervisory System of