5. CMFSA Presentation

8/14/2019 5. CMFSA Presentation

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2009.122009.12


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Current status Points at issue Basic framework

Introduce a comprehensive system Expand business scope Upgrade investor protection mechanism

I. Background for legislation

II. Major changes

III. Others

IV. Expected effects

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I. Background for legislation Current status

Current status of capital market Corporate financing through capital market continues to shrink

Financing through equities

Capital market fails to grow commensurate with real economic growth

8778

6250 48

2001 2002 2003 2004 2005

1412

911

87

2000 2001 2002 2003 2004 2005

(Trillion won)(Trillion won)

53.9 54.0

52.3

52.451.6

52.2

1999 2000 2001 2002 2003 2004

(%, Financing balance)

8 7 .31 0 5 .3 1 0 6 .4

1 3 1 .81 4 5 .6

K o r e a J a p a n U . S U . K . T a iw a n

Equity market by country

(Market capitalization/GDP)

8 3 .5 8 71 0 6 .5

1 6 3 .2 1 8 9 .4

K o r e a G e r m a n y F r a n c e U . S J a p a n

Bond market by country

(Bond reserves/GDP)

Financing through corporate bonds

(%, 2005)(%, 2003)

Ratio of capital marketto financial market

Capital market & its related financial services are yet to be fuCapital market & its related financial services are yet to be fully developedlly developed

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Current status of capital market related financial services Lagging behind commercial banks in terms of restructuring, business size

and profitability

Substantially weak competitivenessSubstantially weak competitiveness in quality and quantity compared to the top 3international investment banks

* 1, 2, 3 and 4 are the 4 major domestic companies (net worth basis)* G: Goldman Sachs * Me: Merrill Lynch * Mo: Morgan Stanley

Restructuring by sector[Number of market players]

31 38

4433

1923

1999 2005

Commmercial

bank

Asset

management

company 0.40.4

1.54.0

1999 2005

Commercial

bank

Securities

company

5.57.1

14.5

5.4

12.8

19.6

2001 2005.1/2

Commercial

bank

Securities

company

Asset

m,anagement

comapny

Business size by sector[Average net worth]

Profitability by sector[Return on equity](%)

Brokerage-oriented business model

(Net revenue, 2004)

Small business size[Net worth]

Low profitability[Return on equity]

0 . 9 1 . 9

- 1 1 .7

4 . 6

1 9 .51 5 .0 1 6 .9

1 2 3 4 G M e M o

(%, 2004)

1 . 8 1 . 7 1 . 3 1 . 2

2 5 .13 1 .4

2 8 .2

1 2 3 4 G M e M o

Others Others

Principalinvestment

Principalinvestment I B

I B

Assetmanagement

Asset

management

Securitiesservices

Securitiesservices

(Trillion won, Mar 2005)

I. Background for legislation Current status

Securitiescompany

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SelfRegulationOriented

Insufficientinvestor

protection

Enhancement ofinvestor protection

by enactingstatutory laws

Regulationby statutory

laws

Insufficientinvestor

protection/market

autonomy

Enhancement of in-vestor protection/market autonomyby enlarging scope

of products andbusiness

Features ProblemPurpose/Approach

case

Jurisdictionswith common

law tradition `Jurisdictionswith statutorylaw tradition

EnglandFSMA2000Australia

FSRA2001

JapanKorea

Capital market & its related services consolidation is global trCapital market & its related services consolidation is global trendend

Started in England in 1987, but jurisdictions are different in termsof motive and approach

Some jurisdictions : to build internationally competitive capital market Others : to gain investors trust in capital market

Regime

I. Background for legislation Current status FSSFSS


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England

Purpose

Regain of market

credibility

Enhancement of

investor awareness

Reduction of

financial crime

Measures

Australia Japan

Same function samesupervision Principle

Investor protection

Mitigation of

concerns regarding

single mega authority

Strengthening of

investor protection

Shift from savings toinvestment

Globalization of

financial market

Financial innovation

Foreign acquisition

of domestic IB allowed

Establishment of

the FSA

Classification of

market and investor

- wholesale/retail- pro/amateur

Establishment of

APRA/ASIC

Strengthening of COB

Classification of

investor

- pro/amateurEnlarging the scopeof financial products

I. Background for legislation Current status FSSFSS


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I. Background for legislation Points at issue

Current capital market laws pose regulatory constraints to progress incapital market and related financial services(1)

Current capital market laws pose regulatory constraints to progrCurrent capital market laws pose regulatory constraints to progress iness incapital market and related financial services(1)capital market and related financial services(1)

As different laws are applied todifferent types of financial

institutions, the same financialfunctions are governed by different

regulations

As different laws are applied todifferent types of financial

institutions, the same financial

functions are governed by differentregulations

Causing regulatory arbitrage and loopholes ininvestor protection, as different regulations are

applied to financial activity of the sameeconomic nature

Causing regulatory arbitrage and loopholes ininvestor protection, as different regulations are

applied to financial activity of the sameeconomic nature

The law enumerates permissibletypes of securities and derivatives

for transaction

The law enumerates permissibletypes of securities and derivatives

for transaction

Restricting development and sales of diverseand creative financial investment products

Restricting development and sales of diverseand creative financial investment products

Concurrent engagement indifferent financial services related

to capital market, such assecurities and asset management,

is strictly restricted

Concurrent engagement indifferent financial services related

to capital market, such assecurities and asset management,

is strictly restricted

Serving as a barrier to raising competitivenessthrough synergy effect from integration,unlike in the case of investment banks

in advanced economies

Serving as a barrier to raising competitivenessthrough synergy effect from integration,unlike in the case of investment banks

in advanced economies

Advanced investor protectionsystem is not in place

Advanced investor protectionsystem is not in place

Undermining investor confidence in capitalmarket with sales of risky products

by deceiving, misleading or not fully disclosing

the extent of underlying risks

Undermining investor confidence in capitalmarket with sales of risky products

by deceiving, misleading or not fully disclosingthe extent of underlying risks

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Authorized service providers

may not do related businessbecause they are allowed to dealwith only conventional products

Unauthorized service providers

can freely engage in related business

1. Constraint in product design2. Insufficient capital flow into

innovative industries

1. Fraudulent sales practice2. Insufficient Investor protection

Innovative Products in Markets

Current capital market laws pose regulatory constraints to progress incapital market and related financial services(2)

Current capital market laws pose regulatory constraints to progrCurrent capital market laws pose regulatory constraints to progress iness incapital market and related financial services(2)capital market and related financial services(2)

I. Background for legislation Points at issue FSSFSS


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Categorizing financial investment services into six areas- Dealing, Arranging, CIS, Investment advisory with/without discretionary power, trust

Allow regulated financial products related business to authorized firms

Fortifying investor protection by introducing business conduct rules in the ActSuitability, Product guidance, Obligatory anti-conflicts of interests system

Enlarging the scope of regulated financial products (negative system)

- Eliminate existing regulatory grey zones

I. Background for legislation Basic framework FSSFSS


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I. Background for legislation Basic framework

Shift to functional regulationShift to functional regulation

Re-classify financial investment services,financial investment products and investors

according to their economic substance (nature)

* Financial function = Services + Products + Investors

Financial function of the same nature shall be governedby the same regulation, regardless of the financial

institutions engaged in the transaction

Introduce comprehensive systemIntroduce comprehensive system

Use a broad-based definition of financial investment productsto embrace them all into the new regime, so as to keep pace with

rapidly developing financial investment products

* Expand the scope of permissible products for financial investment

companies and the coverage of investor protection regulations

Expand business scopeExpand business scope

Allow integration of all financial investment services Dealing, arranging, asset management,

discretionary & non-discretionary investmentadvisory services, asset custodian management

Allow all incidental services Adopt an introducing-broker system Allow forex services in connection with financial

investment services

Upgrade investor protection mechanismUpgrade investor protection mechanism

Put in place advanced investor protection mechanism* Mandate product guidelines to investors

* Introduce the principle of suitability

Establish a system to prevent conflict of interests Expand the scope of securities subject to registration

statement/regulation, including indirect investment

securities and beneficiary certificates

Consolidate capital market laws

into a single law

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II. Major changes Introduce comprehensive system

Permissible securities and derivatives for transaction are enumerated by lawFICs may deal with financial investment products enumerated by law, and

only to which investor protection is applied

SecuritiesSecurities

21 items including government bonds, municipal bonds, specialbonds, corporate bonds, stocks, equity investment certificates,beneficiary certificates, MBS, ELW and ELS

OTCOTC

derivativesderivatives

Type: 4 items (forward, index forward, swap & option)

Underlying assets of securitized derivatives: securities,currencies, commodities & credit risk

Underlying assets: securities, currencies, commodities,credit risk

ExchangeExchange--tradedtraded

derivativesderivatives

(futures)(futures)

Type: futures, option Underlying assets: securities, currencies & commodities

1. Current status1. Current status

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2. Framework Under the new Act2. Framework Under the new Act Introduce a broad-based definition to encompass all financial investmentproducts with investment value*

Allow FICs to structure and deal with all financial investment productsand apply regulations on investor protection to all of these products

All financial products

DepositsInsurancecontracts

Securities,Derivatives

New financialproducts

DepositsInsurancecontractsFinancial investment

products

Concept of financial investment product

Objective (profit acquisition, loss avoidance): the objectives of conventional financial products, and the objectives ofderivates or new financial products

Investment value* (a basis of differentiating financial products from conventional savings deposit or insurancecontracts): characteristics of securities and derivatives

Money transfer: characteristics of securities and derivatives Rights: rights under/by contract

All financial products

The right arising from money transferThe right arising from money transfer by contract at a certain point in time, in either

presentpresent oror futurefuture, with full undertaking of the burden ofburden of loss on the (investment) principalloss on the (investment) principal,

loss exceeding principalloss exceeding principal, or possible additional paymentspossible additional payments in due course of pursuing profitprofit

acquisition, loss avoidanceacquisition, loss avoidance

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The possibility of loss on the principal differentiates financial investmentproducts from non-financial products, such as deposits

Financial product

Financialinvestment product

Non-financialinvestment product

Yes

NoPossibility of loss on principal

Securities

Derivatives

Yes

NoPossibility of lossexceeding principal

Exchange-tradedderivatives

OTC derivatives

Yes

NoTraded on the exchange house

The degree of underlying risks divides financial investment products into two:securities (general financial products) and derivatives (risky financial products)

Derivatives are subdivided into exchange-traded and OTC derivatives by tradingchannel

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Introduce a broad-based definition for each of the 3 categories of financialinvestment products-securities, OTC derivatives & exchange-traded derivatives

Securities

OTC derivatives Introduce a broad-based definition for forward, swap, and option

Exchange-tradedderivatives

Derivatives traded in exchanges

Maximize the scope of underlying assets of securitized derivatives and derivatives

ELS, ELW, FX-linked securities,reverse FRN, etc.

Rights under contract for the purpose of gainingprofits or avoiding losses linked to fluctuationsof underlying asset prices

Securitized derivatives

Indirect investment securities,unregulated indirect investmentsecurities, stocks, contributionquota, etc.

- Investments made in a common public businesswith expectation of profits

-Compensations depend upon a 3rd partysefforts

Investment contract

KDR, GDR, ADRSecurities of issuers that have received thedeposit of equity securities

DepositoryReceipt (DR)

Trust beneficiary certificates,investment trust beneficiarycertificates, etc.

Representing beneficial interestsBeneficiarycertificate

Stocks, subscription right,subscription certificate,

contribution quota, etc.

Representing equity contribution shareEquity

securities

Government bond, municipalbond, corporate bond,commercial paper, etc.

Representing debt liabilityDebt

securities

Con-

ventional

securities

ExampleDefinitionType

Securities, Currencies,Commodities, and Credit risk

Current

Financial investment products, Currencies,

Commodities, Credit risk, and other natural,environmental and economic risks

After

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II. Major changes Expand business scope

Currently, financial investment services are comprised of securities services,futures services, asset management, trust, and discretionary & non-discretionary investmentadvisory services. Their business territories are strictly separated.

Allow FICs to conduct businesses encompassing 6 financial investment services

(trading, arranging, asset management, discretionary & non-discretionary investmentadvisory services, asset custodian management)

Establish a Chinese Wall to prevent the conflict of interests caused by rendering multiple services

Securitiescom

Futurescom

Assetmngmcom

Nondiscretionaryinvestment

advisoryservices

Trustcom

Securitiesbrokerage

Principal investmentUnderwriting

Futuresbrokerage Asset management Asset management

Current: multipleservices restricted

FICs

Dealing Arranging

Assetmngm

Discretionary

invest-ment

advisory

services

Non-discre-tionaryinvest-ment

advisoryservices

Assetcusto-dian

mngm

Investment bankingPrincipal investment

Securities services (brokerage)Asset management

After: Chinese Wall to be established

Discre-tionaryinvest-ment

advisoryservices

1. Remove the boundaries among different financial investment se1. Remove the boundaries among different financial investment servicesrvices

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2. Allow incidental services2. Allow incidental services

Shift to a system that permits, in principle, all incidental services* with someexceptions

* Non-financial services incidental to financial investment services

Current After

[In case of securities

company]

22 services includingsecurities evaluation,

M&A brokerage/arrangement/

agency services,consulting service oncorporate management andrestructuring, securitiessafeguarding, etc.

Servicesscope

Positive-list systemMethod

(Principle)

Allow all non-financial

incidental services

(Exceptions)Services that may have

negative effect on the

soundness of FICs or

investor protection

Services

scope

Comprehensive

(Negative) systemMethod

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3. Expand sales network through introducing3. Expand sales network through introducing--broker systembroker system

Apply introducing-broker system to offer various channels of accessto financial investment products to investors

Make investor protection mechanism Employ the same investment solicitation regulation applied to FICs in order to prevent sales

of risky products by deceiving, misleading or not fully explaining the extent of underlying risks

Currently consider requesting a relevant certificate to guarantee the introducing-brokersbasic qualifications such as securities investment consultant license

FICs to take responsibility for registering introducing-brokers with the FSCand supervising them

- FICs shall be liable for any losses of investors incurred by illegal activities of

introducing-brokers entrusted by them

Investors have to visit branchesin person to purchase financial

investment products, causing

inconvenience

Current

Apply introducing-broker systemto allow brokers to sell financialinvestment products entrusted by FICs

The broker will solicit investmentand connect investors with FICs

AfterAfter

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4. Expand the scope of asset management services4. Expand the scope of asset management services

Expand CIS vehicles to the extent permissible under the Korean Civil orCommercial Codes

[1] Expand vehicles for collective investment scheme (CIS)

Redefine CIS-managed assets in a comprehensive manner and thus expand thescope of CIS-managed assets that are currently enumerated for permission[2] Expand the scope of CIS-managed assets

- Investment trust, company limited

& limited partnership (private offering)

Current

- Investment trust, company limited& limited partnership (private offering)

- Limited liability company,

limited partnership (public offering),anonymous partnership,general partnership

After

Securities, futures, real estate, tangible

property, CP, insurance claims,

fishing & mining rights, etc.

Current

Assets with any form of investment value

such as intellectual property rights, etc.

After

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Remove restrictions on the scope/type of assets to be managed by funds to enhanceautonomy of the asset management industry and satisfy diverse demands of investors

[3] Allow Funds with Mixed Asset

Specialassets

Tangibleassets

Realestate

Deriva-tives

Secu-

rities

Special

assetsfunds

Fund of

fundsMMF

Tangible

assetsfund

Real

Estatefund

Deriva-

tivesfund

Secu-

ritiesfund

Assets for investment determine thescope of each funds operation

Securities fund, derivatives fund,real estate fund, tangible asset fund,MMF, fund of funds, special asset fund

Funds are classified based on theinvestment assets

Current

Special

assets

Tangibleassets

Realestate

Deriva-tives

Secu-rities

MixedMixed

asset fundasset fundMMF

Special

assets

Real

estate

Secu-

rities

Classifi

-cation

Establish funds with mixed assetswhich can be operated freely withoutbeing limited to specific assets

Re-classify the current fund categoriesinto four based on investment assets,while lifting restrictions on theiroperation

After

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5. Expand the scope of FX services5. Expand the scope of FX services Allow FICs to offer authorized or registered services freely

both in domestic and foreign currencies

With regards to management of FICs own assets, all foreign currency transactions shall beallowed, if in full compliance with the procedures set forth in the Foreign ExchangeTransactions Act

These proposed changes will be reflected in relevant FX transaction regulations,along withlegislation of the Capital Market and Financial Investment Servilegislation of the Capital Market and Financial Investment Services Actces Act

Positive-list system Securities companies: funds exchange, foreign

securities trading, partial FX derivatives trading

Futures companies: funds exchange,hedge trade in FX forwards

Asset management companies: funds exchange,foreign securities trading, issuance & offeringof indirect investment securities

in foreign currency

Current

Allow capital transaction(hedging or investment purposes)

with regards to management ofFICs own assets, if in full

compliance with the procedures

Management

of FICs ownassets

money exchange Allow authorized FICs to

engage in foreign currency

transactions without

restriction

Financialinvestment

servicesrelated FXservices

Comprehensive systemAfter

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Enable FICs to provide, through their accounts, incidental services such assettlement, remittance and deposit & withdrawal on demand

Pave the legal grounds for FICs to join the small sum settlement network system of theKorea Financial Telecommunications & Clearings Institute through agency banks

Develop a wide selection of new financial products which will allow FICs to deposit,withdraw and remit without restriction, as in the case of advanced investment banks

AfterCurrent

Not allowedSettlement of credit card bills, giro payment, etc.

Available only during bankbusiness hours with extrafees

Money transfer to other banks

Available only during bankbusiness hours

Money withdrawal from other banks ATM/CD

Not allowedMoney transfer from other banks ATM/CD intosecurities accounts

Permit FICs to provide thesame incidental services

via the financial informationnetwork system

Available only during bankbusiness hours

with extra fees

Money transfer from other banks into securities

accounts

6. Establish the grounds for6. Establish the grounds for FICFICss incidental servicesincidental services

such as settlement and remittancesuch as settlement and remittance

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II. Major changes Upgrade investor protection mechanism

En bloc application of regulations for investor protection in the Capital Market andFinancial Investment Services Act shall be made, covering all, including OTC

derivatives trading currently in absence of investor protection mechanism.

Eliminate loopholes in investor protection

SecuritiesTrading

ActUnregulated

CIS

AssetMgmtAct

DerivativesTrading

(OTC

trading,FX margintrading)

OtherFinancial

Investment Act

(Start-up,Real estate,

Ship investment,etc.)

Indicates the areas without investor protection mechanism

BankingAct

Capital Market and Financial Investment Services Act

FuturesTrading

Act

TrustBusiness

Act

Merchantbank Act

Insu-rance

Act

Small Loan &Credit

Finance

Act

Insu-ranceAct

Small Loan &Credit

FinanceAct

BankingAct

1. Remove loopholes in investor protection1. Remove loopholes in investor protection

Current legal system

New regime under the Act

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Obligate FICs to provide investors with detailed explanation on thecontents and underlying risks of the products when soliciting investment

[1] Introduce the duty of product guidance in full scale

Expand special liability rule to all financial products under which FICs are held liablefor losses and damages incurred to investors from FICs incomplete product guidance

Under review is a plan to enhance investor protection by estimating the loss on principalas the amount of damage in case of any loss on principal

Estimated

amount of

loss/damage

Applied only to indirectinvestment securities

Special liabilityrule

Prospectus or verbalexplanation is provided

Method ofexplanation

Limited number of products

(i.e., indirect investmentsecurities, futures)

Applicable

products

Current

Applied to all financialinvestment products

Estimated

amount of

loss/damage

Applied to all financialinvestment products

Special liabilityrule

Potential investors

understanding shall beconfirmed after due product

guidance is given

Method ofexplanation

All financial investmentproducts

(with investment value)

Applicable

products

After

2. Introduce regulation on investment solicitation2. Introduce regulation on investment solicitation

-- Institutionalize investor protection mechanism in line with gloInstitutionalize investor protection mechanism in line with global standardsbal standards

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The principle of suitability shall be introduced for investment solicitationtailored to investor profiles

[3] Adopt the principle of suitability: Applicable to non-professional investors

Prior to solicitation, grasp investor profiles such as wealth status, investmentpurpose, experience, etc., through interviews with potential investors

Applicable only to non-professional investors who are relatively weak in risk taking and hedging

Unsolicited calls via unwanted phone calls and other methods may infringeon privacy and peaceful life of potential investors

[4] Make a new regulation on unsolicited calls

Therefore, investment solicitation through real-time methodslike visiting and calling shall be permitted only at the investors invitation

[2] Introduce the know-your-customer rule

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Categorize investors into professional and non-professional investors accordingto their risk taking and hedging capacities such as expertise and investment size

Professional Investor

- Financial institutions, large corporations (by number of employees, asset sizeand capital adequacy ratio), government agencies and international organizations

- Individuals who meet certain requirements, such as transaction experienceand financial asset size

Non-professional investor

- Other individuals and corporations that do not belong to the category ofprofessional investors

FSSFSS

3. Regulation will be different according to the type of investor3.3. RRegulation will be different according to the type of investor

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Individual regulations oneach financial investment service (examples)

appliedappliedDuty of good faith

appliedDuty of lawful product guidanceappliedSuitability principle

appliedappliedProhibition of unwanted solicitation

appliedappliedKnow-your-customer rule

Professional investorNon-professional investor

FSSFSS

Entry requirements for FICs are also different according to the type ofinvestor

* Less capital and smaller number of professional staff members are requiredfor the FICs doing business only with professional investors

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Definition of conflict of interests Act of pursuing the interests of FICs or other investors at the expense of the interest of

certain investors

- Conflict of interests takes place in carrying out even a single financial investment service.With multiple financial investment services allowed, conflict of interests between FICs willlikely increase.

Measures to prevent conflict of interests Prohibit conflict of interests by law and enforce it with sanctions Oblige FICs to set up an internal control system in order to monitor and manage conflict of

interests at all times

Make FICs disclose any conflict of interests to investors. FICs are not allowedto render related services until and unless such conflict is resolved

Make organizational separation and/or prohibition of employees holding more thanone position mandatory if serious conflict of interests is deemed to exist

4. Establish a system to prevent conflict of interests4. Establish a system to prevent conflict of interests

FSSFSS

III O h FSSFSS


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III. Others

1. Expand the scope of disclosure and registration requirements1. Expand the scope of disclosure and registration requirements

Apply the current disclosure and registration requirements (registration statement)to all securities that need investor protection

New Act confines exemption from registration obligation only to bonds issuedby government and quasi-government entities

Seek ways to lower expense ratio on securities issuance (stock at 1.8bp, bond at 5~9bpat present) in order to prevent a sharp rise in issuance cost from the expanded application

of disclosure and registration requirements.

* Bonds issued by corporations directly established by law(e.g., Korea Development Bank established by the Korea Development Bank Act)

Current Securities exempted from

registration requirements

Government bonds Municipal bonds Special bonds* Constructive specialty bonds Indirect investment securities Beneficiary certificates etc.

Proposed

Securities to be exempted fromregistration requirements

Government bonds Municipal bonds Special bonds*

FSSFSS

III Oth FSSFSS


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III. Others

The obligation of periodic disclosure of listed companies shall be withheld, when deemednecessary, in consideration of equilibrium between investor protection and business

secrets asas in the issuance registration and regular disclosure.

The 5% rule shall be reformed by abolishing the exemption of the central and municipalgovernments and government funds from reporting.

Regulations on prohibition of insider trading shall be strengthened by expanding theapplication scope to all financial investment products that may gain unfair profits by

usurping on inside information.

Regulations on prohibition of market price manipulation arising from the permittedcross-trading of securities and derivatives shall be completed, which will prevent any

unlawful linkage between spot trading and futures trading for the purpose of unfair and

illegitimate profit generation through price manipulation in either of the two markets.

FSSFSS

2. Reform disclosure requirements and unfair trading activities2. Reform disclosure requirements and unfair trading activities

III Oth FSSFSS


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III. Others

3. Reform self3. Reform self--regulatory systemregulatory system

Legislation of the Capital Market and Financial Investment Services Act willinevitably require review of the current institution-based self-regulatory system,including maintaining the code of business among members, adjusting business-

related disputes and managing the professional personnel system.

With the same financial investment services available across the board, the need for multipleregulatory organizations will be weakened.

Functional self-regulatory system is required with the introduction of functional regulatory regimes. A blueprint for effective self-regulatory system will be prepared in light of the purport of the newconsolidated act after fully taking into account the opinions from member companies

PRO

Dealing

Arranging

Asset management

Discretionary &non-discretionaryinvestment advisory

Asset custodianmanagement

SRO FICs

FSCFSS

KSDA

KOFA

AMAK

Securitiescompany

Futurescompany

Assetmanagement

company

PRO SRO FICs

FSCFSS

SelfRegulatory

Organization

* PRO: Public-regulatory organization * SRO: Self-regulatory organization

Current Proposed

FSSFSS

III Others FSSFSS


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III. Others

A sufficient grace period (1 year 6 months) is granted until the enforcement date afterproclamation of the new law in order to enable the supervisory authorities and market

participants to prepare well.

The supervisory authorities shall be required to reshuffle the current institutionalguideline into a function-based one.

Market participants shall be required to adjust the current equity capitaland modify the human and material resources in order to meet the new functionalrequirements for authorization and registration.

Proclamation date : August 3, 2007 Effective date for the reauthorization of current businesses : August 4, 2008 Overall effective date : February 4, 2009

4. Date of enforcement4. Date of enforcement

FSSFSS

IV Expected effects

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Business scope: The same business scope as that of advanced IBs will be realized[1] Set up a business model in line with advanced IBs

Principalinvestment

Corporatefinancing

Securitiesservices

Asset management

Securitiescom

Futurescom

AssetManagement

com

Non-discretionaryinvestment

Advisory com

DiscretionaryInvestment

advisory comTrust com

Dealing

FICs

Arranging Assetmanagement

Non-discretionaryinvestmentadvisory services

Discretionaryinvestmentadvisory services

Assetcustodianmanagement

Emergence of advanced investment banks (IBs) with global competitiveness

is expected through convergence and consolidation in the financial industry

Emergence of advanced investment banks (Emergence of advanced investment banks (IBsIBs) with global competitiveness) with global competitiveness

is expected through convergence and consolidation in the fis expected through convergence and consolidation in the financial industryinancial industry

Principalinvestment

Corporatefinancing

Securitiesservices Asset management

Advanced IBs

Current

After consolidation

FSSFSS

IV Expected effects

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Financial investment products

ex) Mixed assets funds that can changeinvestment vehicles freelyamong stocks, bonds, real estate,currencies, etc.

Establish funds notrestricted by the targetinvestment asset

ex) Publicly offered indirect investmentsecurities using joint stock companyunder the Commercial Law, anonymouspartnership typed funds, etc.

Structure collectiveinvestment scheme byusing various CIS vehicles

ex) Inverse floaterDual indexed notes (CMT, etc.)Range accrual notesCPPI based notesDigital option embedded notesCredit-linked notes

Fund-linked notesCAT bonds

Design securities thatadopt all kinds ofderivative techniques(Securitized derivatives)

Securities

ex) Derivatives whose underlying assets are

catastrophe, crime rate, weather such asprecipitation, snowfall, sunlight, etc.

Structure derivatives

based on diverserisks measurable

OTCderivatives

ex) Futures and options related to

environment and energy (carbon

emission credits, electric power)

Any derivatives can betraded on the exchange

house if properly structured

Exchange-traded

derivatives

FSSFSS

IV Expected effects FSSFSS


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Competitiveness of the FICs will be raised on the back of their ability to structureand manage all financial investment products such as corporate financing, principal

investment and asset management, as and when deemed necessary.

[2] Strengthen competitiveness by structuring and offering a multitude of

new financial products

IBs Corporate Financing businessExpanded business scope allows IBs to support the structuring of and underwrite new

securities on top of the conventional stocks and bonds, boosting fundraising

capacity of corporations.

Asset Management businessIt will be possible to structure and offer a variety of custom-made securitized

derivatives, indirect investment products and derivatives.

FSSFSS

IV Expected effects FSSFSS


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About 40% of 300 regulations concerning capital marketto be scrapped or mitigated

10

Newly establish 300

Current

Under reform

19010120

After reformEaseScrap

Major regulations to be scrapped are on the following: Prohibition of concurrent engagement in securities, futures and asset

management services

Restriction on financial investment products Restriction on types of vehicles for collective investment scheme

and classes of indirect investment securities

Restriction on management of proprietary assets owned by assetmanagement company, trust company and merchant bank

Obligatory registration with the Financial Supervisory Commissionby securities issuers

[3] Bring regulatory reform

FSSFSS

IV. Expected effects FSSFSS


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Increasing level ofinvestor protection

Increasing level ofIncreasing level of

investor protectioninvestor protectionEliminate loopholes in

investor protection

Eliminate loopholes inEliminate loopholes in

investor protectioninvestor protection

Advanced investor protection

- Product guidance, liability fordamage, suitability

- internal control system foranti-conflict of interest

Advanced investor protectionAdvanced investor protection

- Product guidance, liability fordamage, suitability

- internal control system foranti-conflict of interest

Functional Regulation

- Same supervision for samefunctions

Functional RegulationFunctional Regulation

- Same supervision for samefunctions

Comprehensive System

- Financial products

Comprehensive SystemComprehensive System

- Financial products

Strengthening unfair trading- enlarge the scope ofinsider and securites forinsider regulation

- spot(futures) inked futures(spot) market manipulation reg.

Strengthening unfair tradingStrengthening unfair trading-- enlarge the scope ofenlarge the scope ofinsider andinsider and securitessecurites forforinsider regulationinsider regulation

-- spot(futuresspot(futures) inked futures) inked futures(spot) market manipulation reg.(spot) market manipulation reg.

Procuring informed investment based on full and fair disclosureand effective renumeration

IV. Expected effects FSS

[4] Fortified investor protection will make more credible market

FSSFSS


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Documents

5. CMFSA Presentation