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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
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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보고서 1
Comparative analysis of the margin trading system between the Korean and Japanese stock markets [19-01]
Research Fellow Hwang, Seiwoon / Jan. 10, 2019
Stock trading in the domestic stock market has developed mainly focusing on cash trading, but margin trading has been also steadily increasing. The most important role of stock margin trading will be to increase the market liquidity. This is because frequent trading is likely to ensure the credibility of the prices observed in the market. Market liquidity can give the confidence in the prices by repeatedly providing opportunities for the information on companies to be reflected in the price.

For a long time, margin trading has developed mainly for margin trading long. On the other hand, despite the same economic functioning, margin trading short was very sluggish. Margin trading is a system that can work symmetrically with respect to rises and falls in the stock price, but there exists a high level of asymmetry in the usage of long and short.
It is also noteworthy that the margin trading short has a close relationship with short selling by individual investors. For institutional investors, there are no significant constraints on stock borrowing. However, since individual investors are relatively lower in the credit grade, it is almost impossible to borrow stocks. The margin trading shos virtually a unique borrowing vehicle available to retail investors. This means that if the margin trading short is active, individual investors' accessibility to short sale can be greatly improved. Thus the margin trading short may have a significant impact on individual investors' short selling activities.
Margin trading is divided into the in-house financing in which securities companies use their own funds or securities as lending resources and the KSFC financing in which funds or securities are borrowed from KSFC. KSFC financing is divided into the long and the short again. The operating structure of the long is more complicated than the short. This is because the funds for the long are homogeneous for all cases, whereas stocks for the short can be different case by case. Due to the characteristics of the short, the provision of loan resources is much more difficult for the short than for the long. If these structural differences are not sufficiently reflected in the design of the margin trading system, the symmetry of the long and the short will not be realized properly.

Japanese stock market has a system that can reliably supply the short services to individual investors. The credit problems on individual investors are solved through a centralized supply mechanism. A securities finance company acquires resources for the short by its own credit and provides them to securities companies for the retail services. The centralized supply mechanism is believed to systematically support the short selling activities of individual investors. It is also reported in the academia that this centralized approach significantly mitigated the short selling restrictions on individual investors.
Short selling in the domestic stock markets has been steadily increasing. Active investor groups in the short selling include institutional investors and foreign investors. The share of foreign investors in the short selling in Korea is overwhelmingly high and that of individual investors is extremely low. As of June 2018, the short interests amounted to 16.7 trillion won, a 60% increase over the two-year time period. The KOSPI and the KOSDAQ had short interests of KRW 12.7 trillion and KRW 4.0 trillion, respectively.

In the KOSPI and the KOSDAQ, 0.5% and 1.0% of total short selling are done by individual investors respectively. The sluggish short selling by individual investors seems to be due to the difficulty in the stock borrowing, which is essential for short selling. The only way for individual investors to borrow stocks is through the margin service provided by securities companies. Stocks that can be borrowed through the margin service are limited in terms of label and quantity. 
Short selling in Japanese stock market is quite active. As of 2017, proportion of the short selling in the Japanese stock market reached 38.7%. As compared with the fact that the proportion of short selling in the KOSPI is only 5.5% at the same time, we can see that the short selling in Japanese stock market is very active.

In order for the margin trading system to develop symmetrically both for the long and the short, it is necessary to add significant system improvement. The margin trading short is the only stock borrowing vehicle that individual investors can rely on. The following approaches can be considered for enhancing the accessibility to the short selling.

First, it is necessary to establish a centralized stock lender. The role of brokerage firms plays a large role in the stock lending. However, their role could be limited due to the difficulties in risk management. A centralized stock lending can be more useful when we consider the economies of scale.

There is also a need to increase utilization of the collaterals from the long and design alternative lending sources. Stocks that can be used as financing resources for the short are limited only to stocks explicitly agreed for lending by the margin long holders. It is crucial to find alternative ways to supply for lending. Stock borrowing in B2B market can be a primary consideration. If stock lenders can borrow stocks by their own credit and use the stocks as lending resources, it could help significantly in resolving the asymmetry of the margin trading system. We can also consider mechanisms to increase individual investors’ agreement by enhancing financial incentives and utilization of collateral through the standard terms of condition.
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보고서 1
4th Industrial Revolution and Capital Markets - Artificial Intelligence and Blockchain - [18-04]
Research Fellow Kwon, Min Kyeong and others / Dec. 20, 2018
This report focuses on artificial intelligence and blockchain among the key technologies leading the fourth industrial revolution. This report explains the concepts of artificial intelligence and blockchain, explores the ongoing attempts to introduce and utilize them in the capital markets, and provides implications for capital market players.

Artificial intelligence emerges as one of the key technologies as machine learning, especially the artificial neural network, shows excellent prediction performance. It is actively used in basic technology fields such as image recognition, natural language processing, and anomaly detection, and in complex high-level services such as an autonomous driving car and a virtual assistant.

Artificial intelligence is highly utilized in the capital markets as well. In particular, efforts are being actively made to apply artificial intelligence in the field of asset management, credit evaluation, chatbot, and anomaly detection. Global financial companies are introducing artificial intelligence to increase the efficiency of financial services and reduce their operating costs. Fin-tech companies use artificial intelligence to create innovative financial services. Global ICT companies with technological advantages are also moving to provide comprehensive financial services by combining their customer data with artificial intelligence technology.

On the other hand, as the initial hype subsided, it became known that blockchain, especially public blockchain, was too slow to deal with massive transactions in capital markets and consumed excessive resources (electricity and computing power), and at the same time, various efforts were made to address these problems.

At this point, it cannot be said that virtual currencies (or cryptocurrencies) have become a means of payment to replace fiat currency. In addition, an initial coin offering (ICO) has suggested a new possible channel of corporate finance, but it faces the task of solving the serious information asymmetry problem. The microstructure of the virtual currency secondary market should also be improved.

Most of the blockchains to be used in the capital markets are expected to be private ones. It will also be difficult to use in retail products, and will be introduced mainly in back-office functions and infrastructure components.

The key technologies of the fourth industrial revolution, including artificial intelligence and blockchain, have the potential to significantly change the structure of financial services in the future. In response to the fourth industrial revolution, market players need to identify which area of their business models and value chains the new technologies are well suited for, and to invest in those areas in advance.

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