Korea Capital Market Institute

We examined the possibility of introducing a dollar- denominated securities-trading section on the Korea Exchange (KRX), on which the original shares or depositary receipts (DRs) of Korean blue chips and certain foreign stocks could be traded in U.S. dollars (hereafter dollar). We argue that the introduction of dollar-denominated trading on the KRX would advance the internationalization of Korean securities markets, and complement two of the KRX's primary goals: cross-listing firms from neighboring countries, and drawing foreign investors to trade on the KRX. The following considerations are important in evaluating the impact of the introduction of dollar-denominated trading. ? Securities listed: Korean blue chips or their DRs, foreign stocks that are familiar to domestic investors (including the DRs of Korean firms currently traded on exchanges outside Korea). Domestic blue chips will be the first priority. ? Listing standards: The standards would be equivalent to the listing standards, in the level of investor protection and corporate governance, required of the firms listed on the NYSE. The standards will focus on the qualitative rather than the quantitative requirements. ? Language of disclosure: English. ?Benefits and inducement: Listed firms would be temporarily exempt from the listing fee and would pay a reduced annual fee initially, until the section reached a viable status. The internationalization of the Korean securities markets is an urgent priority, as is achieving a high profile for the KRX brand. It is important to strengthen the competitiveness of the stock market division, which has had the lowest brand power among the divisions of KRX. ? It will advance the internationalization of the Korean securities markets by helping to draw in foreign firms and foreign investors to the KRX. ? Since the KRX is open when the European and American markets are closed, dollar-denominated trading will allow institutional investors (esp. foreign) to trade and hedge Korean blue chips, which are already listed on foreign exchanges, around the clock with less exposure to currency exchange fluctuations.This in turn will bring a fresh liquidity pool to the KRX. ? It will contribute to KRX's goal of becoming the hub for global trading within the East-Asia time zone. The Tokyo Stock Exchange (TSE) has attempted to fulfill this role, but it has not yet been successful, which creates an opportunityfor the KRX. Establishing a dollar-denominated securities-trading section will facilitate the achievement of this goal. ? It will enhance price efficiency on the KRX and have a positive effect on the resolution of the so-called “Korea Discount.” ? A certain amount of Korea Investment Corporation (KIC) holdings could be invested in the section, to support the Korean government goal of making Korea the hub of Northeast-Asia. ? It will enhance the visibility of the KRX among investors on world major exchanges since the closing It will be essential to clarify the legal status of the issuance of dollar-denominated securities. Passage of “The Capital Market Consolidation Act” would resolve most of the issues, except for the case of a domestic firm wanting to issue DRs in Korea based on its stock. Once the legal issues concerning the issuance of dollar-denominated securities are clearly settled, then secondary floating and other issues would become technical matters that could readily be resolved. It will be critical to provide credible assurance to foreign investors that dollar-denominated investments placed in Korea can be liquidated without undue restrictions. The timing of the introduction of dollar-denominated trading on the KRX depends on the priority p