Korea to get investment banks, 2nd stock exchange

Investment banks and a second stock exchange will emerge in Korea, heralding seismic change in the domestic capital market.

According to the Financial Services Commission Tuesday, a revision to the Capital Market Act will bring about such a change. The financial watchdog will officially announce the revision Wednesday and submit it to the National Assembly in October after deliberations by the Regulatory Reform Committee and the Government Legislation Ministry.

The revision will allow large-scale securities companies with more than 3 trillion won (2.85 billion U.S. dollars) in equity capital to run investment banks.

Investment banks can lend acquisition funds to those conducting mergers and acquisitions and give companies loans. In addition, they can sell unlisted stocks and act as prime brokers to lend securities and provide capital to hedge funds.

The revision is expected to prompt five to six large-scale Korean brokerages to begin preparations for investment banking operations.

In March, five Korean securities companies had more than 2 trillion won (1.9 billion U.S. dollars) in equity capital. Daewoo Securities had 2.86 trillion won (2.72 billion dollars), Samsung Securities 2.80 trillion won (2.66 billion dollars), Hyundai Securities 2.69 trillion won (2.56 billion dollars), Woori Investment and Securities 2.63 trillion won (2.5 billion dollars), and Korea Investment and Securities 2.42 trillion won (2.3 billion dollars).

The average equity capital of the five companies was 2.7 trillion won (2.57 billion dollars)

The revision will also set up an alternative trading system, or ATS, that allows stock trading outside of the Korea Exchange.

ATS, known as an alternative stock exchange, will function in the form of competitive trading by obtaining permission from the Financial Services Commission. If trading volume increases to a certain point, ATS will be allowed to compete with the Korea Exchange by turning itself into a stock exchange.

To serve the public interest, the revision will prevent an investor from purchasing more than 15 percent of ATS’s shares. Financial institutions can hold up to 30 percent, however, if they get permission from the financial watchdog.

Financial authorities say the introduction of ATS will foster competition in the stock trading market, reducing trading costs and providing better services to investors. Major advanced economies are already reducing trading costs by setting up alternative stock exchanges.

yunjung@donga.com teller@donga.com