Korean TR, Finally and Officially Coming Soon
Korea is finally adopting a trade repository (“TR”), which is an infrastructure that collects and stores data related to over-the-counter (“OTC”) derivatives transactions. The Financial Services Commission (“FSC”) has decided to implement the TR system by making amendments to the Regulations on Financial Investment Business (which is aligned with Article 166-2(2) of the FSCMA), instead of making amendments to the Financial Investment Services and Capital Markets Act (“FSCMA”) or its Enforcement Decree, and has approved the amendment as of January 31, 2019. As a result, the TR is expected to be activated in July, 2020 as scheduled. Korea is introducing the TR system in order to improve transparency and systematic risk management in its OTC derivatives market as part of its effort to adhere to the G20 accord.
In light of the amendment to the Regulations on Financial Investment Business and the presentation material released by the Korea Exchange (the “KRX”) in November 2018, the major aspects of the to-be-implemented TR system are summarized below.
1. KRX is Likely to be Designated as the TR
As an institution responsible for collecting, storing and managing data related to OTC derivatives transaction, the FSC has an authority to designate a TR. In spite of the regulations on designation criteria and designation cancellation criteria that are implying the possibility of multiple TRs, it is expected that FSC will designate the KRX (which is currently carrying out the central counterparties (CCP) function) as the only TR in Korea, as it was announced in 2015. The KRX and the Data Repository (Singapore) Pte. Ltd., the subsidiary of the Depository Trust & Clearing Corporation (“DCC”; the largest TR operator in the world), have signed a Memorandum of Understanding in 2016 and are working on establishing a successful TR operation platform in Korea.
2. The Scope of Reporting on Transactions and its Exceptions
Financial Investment Business Entities (as defined in the FSCMA) are obligated to report the details of any OTC derivatives transactions that are conducted under their own names and (CCP’s) trades for which they bear the obligations. Financial Investment Business Entities that have such reporting obligation may be not only brokers-dealers, but also banks, futures trading companies or insurance companies that conduct OTC derivatives transactions. Furthermore, if the counterparties to the transaction fall under the obligor classification, they are also obligated to report. In case of fund, however, asset management company is obligated to report.
The details of OTC derivatives transactions that must be reported include, but not limited to, (i) parties to the transaction, (ii) material terms and conditions, (iii) valuation of the transaction and (iv) collaterals.
Although Financial Investment Business Entities shall not be relieved of their duty to perform or liability for nonperformance, they may delegate their obligation to report to a reporting agent. Such reporting agent may be a transaction validation company, brokers or even a foreign TR. (According to the KRX presentation, however, data elements to be reported include many (44) data fields that are not aligned with global standards such as DTCC practice. Therefore, this issue needs to be resolved in order for the DTTC to be able to get delegated as a reporting agent.) A Financial Investment Business Entity may not delegate its obligation to its counterparty to the transaction, yet it may delegate it to multiple reporting agents or a third party that is agreed by both parties to the transaction. Transaction that occurs within a single legal entity does not need to be reported, unless it involves cross border transaction. This is because Korean branch of a foreign entity is also considered “Financial Investment Business Entity” and thereby regulated under the FSCMA. Moreover, data regarding any transaction with the Bank of Korea or transaction that gets cancelled on the trade date do not need to be reported. Nonetheless, details of transaction with any foreign government entity or foreign central bank shall be reported because they do not fall under the above exception.
If Financial Investment Business Entity has obtained CCP clearing pursuant to the CCP regulation before the reporting timeline, it is exempt from the reporting requirement. This is because CCP does the reporting in such cases.
The issue, however, is that the existing transactions still need back-loading, and there are many concerns in the market in this respect.
According to the KRX Presentation, timeline for a trade shall be T+1, provided that it does not involve after-hours trading. There are concerns that the timeline is too short for cross-border transactions.
3. Supervisory role of the Financial Services Commission
The TR must obtain an approval from the FSC in order to establish or change the business regulations regarding its services.
Also, the FSC may carry out reconciliation businesses auxiliary to the TR services. It must, nonetheless, carry out the TR services and the reconciliation business separately.
4. Obligation to Disclose to the Foreign Financial Supervisory Authority
The TR must disclose data related to OTC derivatives transactions to the financial authorities (the FSC, Financial Supervisory Service, Bank of Korea as well as any foreign financial supervisory authority that has entered into an information exchange agreement with the FSC) and regularly (most likely every week) make public reporting of statistical data regarding the transactions on its webpage.
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