Korea Capital Market Institute

Since opening in the early 1990s, Korea’s capital market has experienced a great deal of change both in terms of quality and quantity, e.g., an increase in foreign stock holdings and growth in overall size. Korea’s currency crisis in 1997 accelerated capital market opening and the laws relevant to it were modified accordingly: In 1999, the Foreign Exchange Control Act was replaced by the Foreign Exchange Transactions Act (FETA). And in 2007, the Financial Investment Services and Capital Markets Act (FSCMA) was enacted to facilitate the consolidation of financial markets. In an open economy such as Korea, capital market transactions are frequently combined with external capital transactions with non-residents. This is why FETA is closely related to FSCMA. While the two laws have the common purpose of pursuing sound economic growth, the two differ in terms of their interim goals and policy tools. FSCMA focuses on the micro aspects of the financial investment industry such as fair competitions, investor protections, and sound development of the industry, while FETA stresses macro elements such as free foreign exchange, external transactions, and market-oriented mechanism. As for the medium-term objectives, FSCMA mostly pursues the fairness, credibility, and efficiency of the capital market, while FETA seeks to facilitate external transactions, balance external accounts, and stabilize the currency value. As such, the main area and scope of the two laws are distinctive, i.e., financial investment industry versus external transactions. However, FETA covers all the external transactions between residents and non-residents including financial investments, and the FSCMA mainly deals with the securities and derivatives in financial investments that are inter-connected with the portfolio investment of the balance of payments. In other words, securities and derivatives are regulated by both FETA and FSCMA. FETA is a special law that governs all types of transactions involving foreign currency, and for such transactions, it takes priority over other laws. However, discrepancies between the two laws are evident in areas such as FX margin trading, businesses of foreign exchange brokerage companies, KTB swap transactions, acquisition of non-listed securities in overseas markets, and foreign exchange businesses operated by financial investment companies. This necessitates a more harmonious implementation of the two laws. First, there exist different views on the validity of FX margin trading without brokerage companies and the possibility of foreign transfer of funds. Second, it is unclear whether the investment brokerage companies registered as foreign exchange business institutions should implement derivatives brokerage between financial institutions. Third, the Ministry of Strategy and Finance and Financial Supervisory Commission have different views on KTB swap transactions. Fourth, FETA requires that an acquisition of foreign unlisted bonds should be through an investment brokerage company, while FSCMA does not. Last, there exist an argument on the fairness and excessive regulation for financial investment institutions with regard to foreign exchange businesses in the sense that those should be ex-ante clearly defined in FETA. It is important to note that the aforementioned discrepancies may undermine the credibility of the legal framework among related economic entities, and hence hinder financial markets development. Such discrepancies primarily stem from the different policy tools and interim goals of FSCMA and FETA, but partly result from the dual governing structure where each law is administered by a different government ministry. To enhance the compatibility of the two laws, an increase in policy cooperation between the two ministries is necessary. Conflicting issues should be amended or clarified during the next revision of the relevant laws. Also, private economic entities need to better understand the related laws and regulations.