Financial Services Commission Imposes Fines on 19 Asset Management Firms for Violating MMF Operation Regulations

[Asia Economy Reporter Eunmo Koo] Financial authorities have imposed a series of fines on asset management companies that violated the Money Market Fund (MMF) operation regulations.

The Financial Services Commission announced on the 22nd that at the first regular meeting held on the 15th, it resolved to impose fines ranging from 10 million to 70 million KRW on 19 asset management companies that included and operated 'Credit Default Swap (CDS)-linked Asset-Backed Commercial Paper (ABCP)' in their MMFs. This decision was based on the judgment that the actions of these management companies contradicted the fundamental purpose of MMFs, which is to ensure stability and liquidity.

Under the Capital Market Act, considering that MMFs are products for customers to temporarily deposit surplus funds rather than active asset growth tools, the investment targets of MMFs are strictly limited to bonds and commercial papers with short remaining maturities and excellent credit ratings. Additionally, it prohibits the inclusion and operation of structured products that could cause excessive risk to investors by expanding losses in the event of specific credit incidents.

The Financial Supervisory Service recently expressed concerns about excessive profit-seeking by financial companies and concentration in specific sectors, urging financial companies to understand the fundamental purpose of regulations and to make efforts to protect financial consumers.

CDS-linked ABCP is asset-backed commercial paper issued based on CDS contracts as underlying assets. The special purpose company (SPC) issuing ABCP acquires high-grade bonds and other assets with the proceeds from ABCP issuance and provides them as collateral for the fulfillment of CDS contracts.

CDS-linked ABCP typically offers high returns reflecting both the interest rates of underlying assets such as corporate bonds and the CDS premium. However, if a credit event specified in the CDS contract occurs, the underlying assets provided as CDS collateral are primarily used to cover CDS losses, resulting in large-scale losses for ABCP investors. This is a structured product with such a risk structure.