Peter Stein ASIFMA CEO "Foreign Registration System Coexists, Complex... Wants Choice" [Asking the Future of Korean Capital Market]

②Exclusive Interview with Peter Stein, ASIFMA CEO
160 Global Institutions and Financial Firms Including Goldman Sachs, JP Morgan
Coexistence of LEI and IRC Causes Operational Complexity and Excessive Short Selling Penalties
...Factors Hindering Global Investors' Entry into the Korean Market

Editor's NoteAt the beginning of this year, financial authorities focused their policy efforts on enhancing corporate value by promoting the 'Corporate Value-Up Program' to resolve the undervaluation phenomenon in the domestic stock market (Korea Discount). After the value-up program was unveiled in May, the domestic stock market saw a brief rise centered on beneficiary stocks but has been on a downward trend since peaking in July. Due to uncertainties surrounding the second Trump administration's policies after the U.S. presidential election and concerns over the deterioration of the Korean economy amid strong dollar pressures, the KOSPI index fell below the 2400 level, indicating a precarious situation. As concerns over foreign exchange losses due to the high exchange rate intensified, foreign investors' withdrawal accelerated. Asia Economy conducted a relay interview with overseas institutions to explore what changes are needed for foreign investment funds to flow into Korea. Through this, we seek solutions to expand foreign investors' inflow into the Korean market and examine policy tasks that need to be addressed.

"Please allow existing (foreign) investors to change the registration number they received through the Foreign Investor Registration System (IRC) to a Legal Entity Identifier (LEI)."

Peter Stein, Chief Executive Officer of the Asia Securities and Financial Markets Association (ASIFMA). ASIFMA.

Peter Stein, CEO of the Asia Securities Industry & Financial Markets Association (ASIFMA), said this in a written interview with Asia Economy on the 19th, pointing out that "if LEI and IRC coexist, operational complexity increases." ASIFMA is an institution representing 160 global investors and financial institutions worldwide, including Goldman Sachs and JP Morgan.

The IRC was introduced in 1992 to manage foreign ownership limits on listed stocks but has been maintained for about 30 years even after the foreign ownership limit was essentially abolished in 1998. Accordingly, before December last year, foreign investors had to separately register their personal information with the Financial Supervisory Service to receive an investment registration number before investing in domestic stocks or bonds. This registration process took time and required many documents, which was criticized for reducing accessibility for foreign investors. Since the abolition of the foreign investor registration system, corporations can open accounts at securities firms using LEI (standardized ID assigned to corporations), and individuals can use their passport numbers. Foreign investors who had previously registered can continue to use their existing investment registration numbers.

Peter Stein CEO positively evaluated that "replacing IRC with LEI to simplify the new investor registration process in Korea is a good thing," but he also pointed out operational difficulties in fund management arising during the market's adaptation to the new system.

For example, global asset management firms must conduct trading and settlement for each fund, which is the unit of investment registration. Since IRC and LEI coexist, investors with existing IDs are managed under IRC, while investors newly joining funds are managed under LEI. This means that investor information registered under both IRC and LEI coexist within a single fund, complicating management. Therefore, the global market requests that investors who previously received IDs through IRC be allowed to register under LEI when joining new funds, or that new foreign investors be given the option to register under IRC.

In Korea, the Capital Markets Act, Telecommunications Business Act, Broadcasting Act, and others restrict foreign ownership of some listed corporations operating in key industries vital to the national economy. Once the limit is reached, foreigners cannot purchase more shares of that stock. However, if the same individual is assigned both IRC and LEI, the financial investment industry explains that this could cause difficulties for regulators in managing foreign ownership limits.

If excessive short-selling penalties remain... "Global investors may reduce market participation" warning

While positively evaluating the government's 'Corporate Value-Up Program' promoted since early this year, Peter Stein CEO predicted that it might take some time to confirm the policy's effects. He said, "It is very encouraging that Korea is focusing on improving corporate governance and enhancing shareholder rights, which are welcomed by global investors. Based on experience, such methods may take time to show results, but I believe Korea is moving in the right direction."

He identified excessive regulations and system issues as factors hindering global investors' entry into the Korean market.

He said, "For many global investors, the biggest issue in Korea is short-selling restrictions. Beyond the ban on short-selling, sudden policy changes, systemic issues, and excessive penalties reduce motivation to invest in the Korean market regardless of the lifting of the short-selling ban. Not only hedge funds but also active fund managers including long-term investors and financial institutions serving them may consider the risks and costs they must bear in Korea to be too high."

He also emphasized at a conference held by the Korea Exchange earlier this month that the expansion of the short-selling ban is a major factor in the 'Korea Discount.' At an investor relations (IR) event held in Hong Kong targeting overseas investors, Lee Bok-hyun, Governor of the Financial Supervisory Service, expressed expectations for the resumption of short-selling. However, he warned that if excessive penalties remain even after short-selling resumes, global investors' market participation may decrease.

He said, "Global investors use various investment strategies. Many passive investors take long positions using indices such as MSCI and FTSE Russell while simultaneously short-selling. Even after the short-selling ban is lifted in March next year, if excessive penalties remain, many foreign investors may consider short-selling unsafe for additional profits, which could lower overall returns in the Korean market and lead them to invest more in other countries' markets where higher returns can be generated." He added, "There are also market-neutral active investors who take both long and short positions to generate higher returns. If excessive penalties remain after the short-selling ban is lifted, it could hinder these investors' market participation. Ultimately, if global investors reduce their market participation, Korea's attractiveness as a listing venue for initial public offerings (IPOs) may decline."

He also emphasized that regulatory easing such as the resumption of short-selling would help Korea's inclusion in the Morgan Stanley Capital International (MSCI) developed markets index. He said, "Countries classified as developed markets by MSCI are easily accessible to global investors, who can use short-selling as a cost-effective hedging tool. Developed markets under MSCI have stable and predictable regulatory environments, and regulators adjust policies through public consultations with market participants. Environments where regulations can change without prior notice cause uncertainty and reduce investment willingness."

The best countries to invest in Asia are 'Japan'... Taiwan and India also attractive

Regarding the extension of foreign exchange market trading hours until 2 a.m., he said the system needs time to adapt to the market. Since July, the government extended the foreign exchange market trading hours to 2 a.m., coinciding with the London financial market closing time, and allowed foreign financial institutions to participate in the foreign exchange market.

Peter Stein CEO said, "The government has taken proactive measures to open the foreign exchange market to global investors applying as Registered Foreign Institutions (RFI) and extended trading hours to 2 a.m. considering global investors' time zones. However, this system may still require time for the market to adapt. If liquidity is insufficient, it could affect global investors' price discovery for optimal investment decisions."

Since liquidity during extended hours depends on how many market participants actively trade, this implies that institutional improvements to encourage market participation must continue steadily.

Compared to Korea, he first named Japan as the country in Asia with the best environment and system for investment. He evaluated, "Japan is a developed market and naturally one of the easiest markets for global investors to invest in. It has sufficient hedging tools and low transaction costs (including stamp duties). Japan has also steadily improved over the past decade, and investors' interests align well with those of the companies they invest in."

Peter Stein CEO judged that in the past, Korea did not benefit from the spillover effects of capital outflows from China due to governance issues and regulatory environment, and that global investment funds that left China flowed massively into Japan.

Besides Japan, he named Taiwan and India as attractive markets. Peter Stein CEO explained, "Taiwan and India have become attractive markets for global investors due to macroeconomic or country-specific factors (India's high GDP growth rate and Taiwan's focus on the technology sector)."

Meanwhile, regarding the Korean capital market, he viewed, "Korea is showing an upward trend as a global leader in innovation with well-known corporate brands, highly skilled personnel, and extensive cultural influence, while efforts to resolve corporate governance, shareholder value, and regulatory obstacles are bearing fruit."