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Our Survey Paper provides a focused review on financial policies as well as management cases to present insights on financial market development.

보고서 1
Securities Sector’s Financial Soundness in Korea Presented through Comparison with Foreign Regulatory Frameworks [22-01]
Senior Research Fellow Lee, Hyo Seob / Feb. 21, 2022
Although securities firms have played a pivotal role in the development of capital markets, in-depth research on financial soundness regulations that have the greatest impact on their business activities has rarely been undertaken. Since its first introduction to Korea in 1997, the previous Net Capital Ratio rule had been in place for about 20 years. In 2016, the financial authorities decided to adopt the new Net Capital Ratio approach (new NCR) with a view to enhancing global competitiveness and expanding risk investment capabilities. However, a systematic analysis of how the introduction of the new NCR has affected Korea’s securities sector has not been sufficiently conducted. In this regard, this report intends to take a look at financial soundness regulations on the securities industry in major economies like the US, Europe, and Japan, countries with a long history of the capital requirements regulation, and to examine changes that the adoption of the new NCR has brought about to Korea’s securities sector. In addition, it would analyze regulatory divergence between Korea and other advanced countries, aiming for presenting directions for regulatory improvement in the prudential framework to which Korea’s securities firms are subject.
   
As shown in the analysis of regulations on the securities sector’s financial health in major economies, the US NCR has evolved based on the philosophy of company liquidations-related liquidity requirements with a top priority of protecting customers’ assets in case of an insolvency event. The US introduced the NCR in 1934 when the Securities Exchange Act came into effect, and established the current capital requirement formula after undergoing several revisions such as the 1975 introduction of the Uniform Net Capital Role. The current NCR approach can be classified into three types: the basic method, the alternative method, and the alternative net capital method. European countries including the UK use a Basel-style approach that has emphasized the importance of preventing bankruptcies of securities firms under the regulatory philosophy of the going concern-based prudential framework. The previous Basel-based regulation on the securities sector is similar to the capital requirements to which commercial banks are subject. Europe is expected to significantly improve regulations on the securities industry’s financial soundness from the second half of 2021. This means that in practical terms, European countries would shift towards the US NCR approach.
 
Amid the worsening financial health of securities firms in the mid-1990s, Korea introduced the previous NCR rule in April 1997 by benchmarking Japan’s capital requirements framework. The previous NCR rule laid the foundation for the regulatory framework for the securities sector’s financial health, which helped securities firms overcome the 1997 Asian financial crisis and the 2008 global financial crisis. Since the new NCR was implemented in 2016, Korea’s securities industry has seen a sharp increase in equity capital amount, expanded into overseas markets, and considerably increased profitability in IB businesses. Given this performance, the new NCR appears to have achieved its policy objectives. On the other hand, some brokerage firms have seen a surge in the issuance of derivative-linked securities and the debt guarantee value over the same period, which increased prudential risks in some segments. Furthermore, small securities firms have suffered reduced investment capabilities and worsening profitability. This highlights that the impact that the new NCR approach had on the securities industry varied by size of firms.  
   
Additionally, this report undertook a comparative analysis of capital adequacy requirements for the securities sector in both Korea and major economies. The analysis reveals that in terms of calculating the capital adequacy ratio, the net operating capital, and gross risks, Korea’s regulatory regime is more stringent than those of other countries. Korea is not much different from its counterparts when it comes to the calculation of capital adequacy ratios. However, its regulatory scheme can be considered more rigorous given that Korea is applying a single capital adequacy ratio to brokerage firms regardless of their size. What is also notable is that it is hard to find any government around the world that has adopted a leverage ratio regulation as part of the prompt corrective action system. Against this backdrop, the introduction of the leverage ratio regulation to the securities sector appears to be a somewhat stringent regulatory measure.
The following suggestions should be taken into consideration to improve Korea’s regulatory framework with respect to the securities industry’s financial soundness. First, the financial authorities need to provide more flexibility to the application of capital adequacy ratios depending on the size and function of securities firms. For instance, it may be desirable to apply the Basel-style capital requirements to IB securities giants and to allow small- and medium-sized brokerage firms to choose between the net capital ratio and the Basel-based approach. Second, the net operating capital and gross risks should be calculated in proportion to economic risks. Third, it is necessary to keep to a minimum the use of capital requirements for achieving policy objectives. Lastly, in the long run, the leverage ratio system should be employed only to curb systemic risks. In this regard, the potential systemic risk of the securities sector needs to be assessed on a regular basis, and if the risk assessment shows that the risk level remains low, the regulatory threshold of leverage ratios should be reduced.  
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보고서 1
Discussion on Implementation of Mandatory Corporate Sustainability Reporting [21-01]
Senior Research Fellow Lee, Inhyung and others / Dec. 22, 2021
Listed companies that meet specific size criteria are obliged to disclose sustainability-related information, starting from 2025. This paper aims to provide a conceptual framework for discussing how the sustainability reporting is to be disclosed while at the same time introduce the current international discussions that are led by both the EU and the IFRS Foundation.
 
Sustainability reporting differs from traditional financial reporting in several key ways: For example, it has to deal explicitly with externalities firms cause and how they are incorporated back into the firm value over the short, medium and long-term period. In doing so, faced with a multitude of stakeholders, a firm also has to decide in a strategic manner which of those externalities are of material importance, setting priorities and action plans that can mitigate potential risks or enhance adaptability. This introduces a forward-looking and dynamic dimension to the decision-making process, which must be conveyed to the stakeholders through the sustainability disclosure.
 
The experience of the EU – three years of mandatory Non-Financial Reporting Directive (NFRD) - is introduced through the analysis of the progress assessment report and the proposed Corporate Sustainability Reporting Directive (CSRD). The proposed framework by the European Financial Reporting Advisory Group (EFRAG), with adherence to their principles, suggests three layers of reporting to promote comparability and relevance while covering three topics in the area of strategy, governance, and targets.
 
The newly created International Sustainability Standards Board (ISSB) under the IFRS Foundation is expected to review the prototype on the sustainability-related financial information disclosure standard suggested by the Technical Readiness Working Group (TRWG). The prototype aims to provide financial information related to sustainability issues faced by a firm, thereby making a distinction with the EFRAG framework, which upholds the double-materiality principle.
 
The international baseline framework for sustainability disclosure standard that the ISSB promotes is expected to be the basic anchoring framework that integrates financial information related to sustainability issues with the traditional financial statement. EU, which is the most significant economic block that adheres to the IFRS standard for its financial reporting, is expected to adopt the ISSB baseline framework. They share the Task Force on Climate-related Financial Disclosure (TCFD) and the Sustainability Accounting Standard Board (SASB) framework, and the principles applied are more or less the same as each other. However, the EU is likely to add additional standards that reflect their political agenda and ideology, which is already implemented through legislative acts such as EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR).

Implications of adopting the international baseline for domestic purposes are provided in the last chapter for domestic policy discussion and implementation. 
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보고서 1
Changes to US and EU Securitisation Regulation and Their Implications [19-03]
Senior Research Fellow Kim, Pil-Kyu and others / Feb. 08, 2019
This study aims to examine changes to securitisation regulations in the United States(US) and the European Union (EU) since the global financial crisis and draw implications of the findings for better securitisation regulatory framework in Korea.

Inadequate regulation of securitisation has been cited as one of the factors amplifying the global financing crisis. More specifically, the relevant disclosure regimes were not enough to capture ABS risks, and no regulatory tools were available to address conflicts of interest in ABS transactions, and no regulation was in place to curb excessive securitisation. On top of that, investors relied overly on credit rating agencies as a source of information regarding ABS because ABS information was often limitedly available.

Following the global financial crisis, the US and the EU have revamped their regulatory frameworks for ABS transactions. When looking at regulatory developments relating to ABS disclosure, the US revised Regulation AB in 2014, thereby tightening asset-level disclosure and introducing new requirements for certain asset classes to disclose standardized asset-level information in order to help investors better understand the characteristics of underlying assets. In addition, the revisions include expanded disclosures about underlying assets and transaction parties, and several changes to the content of disclosures so as to enable investors to conduct their own analysis of underlying assets and securitisation structures without reliance on credit ratings. Meantime, the EU strengthened the disclosure of information on ABS transaction parties to ensure that investors have a sufficient understanding of transaction structures and characteristics, and adopted specific reporting requirements for underlying assets. Notably, the EU introduced disclosure templates per asset class to provide investors with more detailed information about the assets underlying ABS by asset type, and imposed requirements on issuers, originators and sponsors to publish jointly information on the underlying assets and the structure of the securitisation transaction sufficient to conduct stress tests, if needed, to assess the creditworthiness of the underlying assets.

The major difference in the changes to ABS disclosure between the US and the EU is that the US adopted more detailed disclosure requirements only for the retail finance sector whereas the EU adopted disclosure templates for diverse asset classes, especially applying disclosure requirements to ABCP. Another difference can be found in shelf-registration. The US put shelf-offering process for ABS and shelf-registration forms for ABS issuers in place but the EU has no relevant requirements. This is attributable primarily to differences between the US and European ABS markets in terms of market size and structure, and different regulatory frameworks in the two regions.

The US and the EU introduced new regulation that requires originators to retain at least 5% of the credit risk of the underlying assets in order to address conflicts of interest in ABS transactions. The US and EU risk retention rules are slightly different. The US allows originators to use various risk retention methods, and impose more lax risk retention requirements on or provide exemptions from the requirements for any ABS backed by qualified assets, such as residential mortgages, commercial real estate loans, commercial loans, and auto loans that meet certain criteria, and mortgages acquired by government agencies issuing MBS. The EU has more stringent regulation that allows investments in ABS only if originators have explicitly disclosed that it will retain at least 5% of the securitised exposure.

The existing Basel II risk-weighted assets computation for securitisation exposures shows mechanistic reliance on credit ratings given by external credit rating agencies, and assigns relatively low risk weights to high-rated securitisation exposures and relatively high risk weights to low-rated securitisation exposures. Furthermore, the existing calculation may lead to so-called cliff-effects that refers to substantial increases in capital requirements resulting from deterioration in the credit quality of the underlying assets. To solve this problem, Basel III requires banks to conduct their own internal assessments if the securitisation exposures have an external credit ratings, eliminating certain cliff-effects associated with credit risk mitigation activities, and introducing higher capital requirements for complex securitisation transactions.
The tightening of ABS regulation had large impacts on the ABS markets. The stronger regulation and weaker investor confidence in ABS resulted in a significant market contraction. ABS issuance volumes in the US and the EU dropped by about half immediately after the global financial crisis. Since 2015, however, the US ABS market has recovered gradually whereas the European ABS market has remained sluggish.

One reason for the stuttering EU ABS market is an increase in issuance costs resulting from more stringent regulation. Discussions have been underway in Europe on how to revive the ABS market. Part of the efforts are the adoption of a single, uniform regulatory framework for all securitisations in the EU, and the introduction of a differentiated regulatory regime for simple, transparent and standardized(STS) securitisations. The EU defined the basic concept of STS securitisation, and introduced implementation mechanism based on the definition of STS securitisation. In the meantime, the Basel Committee on Banking Supervision made revisions to its securitisation framework to reduce risk weights for STS securitisations in the belief that because STS securitisation is a low-risk transaction in a relatively simple structure, a lower risk weight can be applied to a STS securitisation transaction than a complex securitisation transaction. STS securitisation has been introduced only recently and its concrete implementation plan has yet to be finalized, which make it somewhat difficult to assess its effects. Nevertheless, in the long term, STS securitisations is expected to help reduce regulatory costs and enhance incentives for investors to make investments in securitisation products.

Korea’s ABS market is different from the US or EU market in terms of the way the market was created. The US or EU ABS market sprang up and developed on the back of existing securities-related laws. Conversely, the Korean ABS market was created by the government. The enactment of the Asset-Backed Securitization Act(ABS Act) laid a legal and institutional foundation for the ABS market along with relatively stringent regulatory framework in place. The Korean market is also a far cry from the US or EU market in terms of market structure. Various securitisation structures and relatively complex structures can be seen in the US and European ABS markets. Moreover, a high proportion of securitisation transactions in these markets seek to obtain risk transfer. On the other hand, fund-raising is the primary purpose of securitisation in Korea.

Such differences should be reflected in drawing out implications of the changes to securitisation regulations in the major countries. Most importantly, revisions to the ABS Act are required to promote sound development of the ABS market in Korea. The ABS Act should be amended not only to enhance the soundness of the market but also to increase regulatory flexibility, thereby enabling the adoption of various securitisation structures. In addition, Korea needs to push for better ABS disclosure regime after looking into the improved ABS disclosure regimes in other countries. Among other things, stronger ABCP disclosure is needed. From a short-term perspective, it is worth considering the introduction of an integrated data system that provides ABCP issuance information along with rating summaries from credit rating agencies. From a long-term perspective, it should consider the adoption of a comprehensive disclosure regime for securitized products including both ABS and ABCP.

Furthermore, it is necessary to improve the domestic ABS disclosure regime in response to global regulatory changes and to consider the adoption of a regulatory framework to tackle conflicts of interests of originators. It should be noted, however, that the adoption of regulation on conflicts of interest has to be preceded by assessment of ABS characteristics and review of potential conflicts of interest. If the analysis results support the adoption of a requirement to have originators hold the subordinated tranches of a securitisation, a phased introduction of the risk retention requirement is worth considering together with measures to minimize its negative effects.
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보고서 1
Analysis of Securities-based Crowdfunding Markets in Korea [19-02]
Research Fellow Park, Hyejin and others / Jan. 21, 2019
This paper studies the characteristics of Korean securities-based crowdfunding markets and the behaviors of investors during the crowdfunding campaigns, thereby providing policy implications as to improve the current system. Securities-based crowdfunding is a new financing method for startups that are too small to be funded by angel or venture capital and financing from their friends and family are not enough to cover their financing needs. Besides, securities-based crowdfunding has other benefits. For example, professional investors such as angels and venture capitalists can use the crowdfunding outcome to predict the future of demand of the goods or assess the future returns of their investement projects. 

First, we review the concept of securities-based crowdfunding and its relations to other venture investors, and then discuss some features of main participants of securities-based crowdfunding markets such as entrepreneurs (issuers), individual investors, and platforms. Majority of issuers that attempt to raise capital via crowdfunding are early ventures, but some of them tend to be more suited to crowdfunding than others. For example, very high-tech firms whose business models are based on complex technology are less likely to be a good fit since unexperienced individual investors without knowledge in that area may be hesitant to commit their money to that venture’s project. In terms of crowdfunders, we focus on their investment behavior during crowdfunding campaign. We observe herding behaviour of the investors in the early days of funding windows, implying that the early performance has significant effects on the final funding results. Regarding platforms we overview the crowdfunding process operated by these platforms and compare their business models.

Next, we investigate the role of signals about hidden quality of the project and campaign-related information on funding success and investors’ decisions to commit financing. Our results show that backing by professional investors,  funding target, and campaign duration play a significant role for the funding outcome. However, we also find that hard information about the issuer’s ability such as performance in the past crowdfunding campaigns, certification as social company or venture firms have little or not impact on the funding outcome. Furthermore, we find that backing by professional investors have the opposite effects on funding success and the other small investors’ participation in crowdfunding; receiving more funding from professional investors contributes to funding success but it might decrease the chances that other small investors participate in that project. Finally, we discuss the policy implications of these results.
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