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Exceptions to Registration Requirement for Sale of Derivative Linked Securities by Foreign Investment Traders in Korea

2013.04.29

1. Background 
 
The Financial Investment Services and Capital Markets Act (the "FISCMA") prescribes that when a foreign investment trader issues certain derivative linked securities and sells them in a domestic market through a domestic investment trader or investment broker, the foreign investment trader will be construed as a financial investment business entity and therefore must obtain authorization from, or register with, the Financial Services Commission. However, while recognizing a need for regulatory control and investor protection, the Enforcement Decree of the FISCMA makes an exception for foreign investment traders that meet certain requirements and not count them as financial investment business entities for the purposes of the FISCMA. 
 
FISCMA provides that a foreign investment trader need not obtain an additional authorization from the Financial Services Commission, provided that it satisfies the following conditions – (i) a soundness of business management and prevention of unfair trading of a foreign investment trader are under the strict supervision of the foreign financial investment supervisory agencies in relation to the issuance of the derivative linked securities; (ii) the foreign investment trader shall have adequate investing capabilities, good financial standing and social credibility; (iii) the Financial Services Commission may receive investigation or inspection documents about the foreign investment trader from the foreign financial investment supervisory agencies; (iv) the derivative linked securities are traded in the domestic market and acquired by the domestic investment trader or sold to the professional investor through the investment broker. 
 
With respect to these conditions, on November 21, 2012, the Financial Services Commission has further specified the second condition – investing capability, good financial standing and social credibility of the foreign investment trader – through the Amendment of the Regulations on Financial Investment Business: 
 
 
2. The total assets amount and business size of the foreign investment trader is in compliance with international business standards, and the foreign investment trader has good international credit standing 
 
 
3. The equity capital ratio to risk-weighted assets in terms of the Bank for International Settlements (BIS) exceeds eight percent for the latest three consecutive years or satisfies the following conditions  
 
i. Complies with the standard of financial soundness set by the relevant foreign regulatory institution 
ii. Satisfies investing capability standard set by internationally recognized credit rating agencies 
 
 
4. The foreign financial investment trader shall not fall under any of the following – the foreign investment trader has not been subject to any criminal punishment beyond a fine for a violation of the FISCMA, the Decree, any of the finance-related Acts and subordinate statutes, the Monopoly Regulation and Fair Trade Act, or the Punishment of Tax Evaders Act during the past three years 
 
 
5. The following period has lapsed after an order was given for shutdown or suspension of business operation in whole or in part: 
 
i. Suspension of business operation in whole: 3 years after the date on which suspension ended 
ii. Suspension of business operation in part: 2 years after the date on which suspension ended  
iii. Shutdown or suspension of business operation for branch and other offices in whole or in part: 1 year after the date on which such orders are given  
 
Recently there have been issues as to whether a foreign investment trader should obtain an approval to establish financial investment business under the FISCMA, if a domestic investment trader purchases the derivative linked securities such as Credit Linked Note (CLN) issued by the foreign investment trader and gives the domestic investor monopoly over such derivative linked securities. 
 
The regulation has been relaxed since September 30, 2012 under the Enforcement Decree of the FISCMA, eliminating the need for an approval to establish financial investment business even if the foreign investment trader issues the derivative linked securities and sells them to the domestic investment trader, provided that it satisfies certain requirements. 
 
Additionally, the Financial Services Commission has specified the requirements for exception through the amendment of the Regulations on Financial Investment Business. Accordingly, the regulations on sales of the derivative linked securities by the foreign investment trader to the domestic investment trader or by the investment broker is regarded as having been partially relaxed.

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