"ETF Trading Possible on ATS as Well"…Financial Services Commission Announces Legislative Notice

Institutionalization of Fractional Investment Issuance Platforms
FSC Announces Legislative Notice for Amendments to the Capital Markets Act Enforcement Decree and Rules

The Financial Services Commission (FSC) is revising regulations to allow trading of exchange-traded funds (ETFs) and exchange-traded notes (ETNs) on alternative trading systems (ATS). It is also promoting institutional improvements such as establishing a small license for investment brokerage businesses for fractional investment issuance platforms and securities lending brokerage platforms.

On the 3rd, the FSC announced the legislative notice for amendments to the Enforcement Decree and Enforcement Rules of the Capital Markets Act, the Financial Investment Business Regulations, and the Regulations on Issuance and Disclosure of Securities (hereinafter referred to as 증발공).

Through this legislative notice, a new ATS licensing unit will be established to allow trading of ETFs and ETNs separately from the current ATS trading products, which include stocks and overseas stock depositary receipts (DRs). NextTrade, which is set to launch soon, will be able to conduct trading after acquiring the newly established ETF and ETN licensing unit through this amendment.

Additionally, ATS will be exempted from the net capital ratio (NCR) application and will be supervised based on capital adequacy according to their own capital. The Korea Exchange is also not subject to NCR but only has the obligation to maintain its own capital. Management improvement recommendations for ATS are set at 100% of the capital requirement for licensing, management improvement requests at 85%, and management improvement orders at 70%. Changes to fees or investments exceeding 10 billion KRW in IT infrastructure will be subject to review by the Market Efficiency Committee.

Furthermore, fractional investment securitization issuance platforms and automated securities lending trading platforms, which are currently operating under a sandbox, will be formalized as official systems. Fractional investment refers to the securitization of underlying assets such as real estate and intellectual property rights and selling them to general investors. Fractional investment using public offering of securities generally falls into two categories: issuing non-monetary trust beneficiary certificates after entrusting the underlying assets, or issuing investment contract securities after transferring shared ownership interests of the underlying assets to investors.

Under the current Capital Markets Act, investment contract securities can be issued after submitting and having a securities registration statement approved. However, issuance of non-monetary trust beneficiary certificates has limited legal grounds and has been operated under a sandbox. Through the amendment, a new investment brokerage business will be established to institutionalize fractional investment issuance platforms using the non-monetary trust beneficiary certificate method, and supervision measures for issuance of beneficiary certificates will be prepared.

At the same time, to strengthen the role of underwriters and lead managers in the initial public offering (IPO) market, due diligence will be made mandatory, and receiving listing fees not specified in contracts will be prohibited.

Also, when a non-listed corporation with greater corporate value merges with a listed corporation and becomes listed, it will be considered a backdoor listing and added to the listing requirement review targets, as it effectively results in the non-listed corporation becoming listed. Currently, reviews are conducted only when a non-listed corporation with larger assets, capital, or sales in two or more categories merges and lists, or when the largest shareholder of the listed corporation changes to the largest shareholder of the non-listed corporation.

In addition, securities firms will be allowed to include not only foreign government bonds but also international organization bonds and foreign currency-denominated Korean corporate bonds (KP bonds) in foreign currency repurchase agreements (RP) offered to investors. The limit for small-amount bond transactions by general investors, which exceptionally allow same-day settlement, will be raised from under 5 billion KRW to under 10 billion KRW.

The legislative notice period is until March 17. Afterward, it will undergo review by the Regulatory Reform Committee and the Ministry of Government Legislation, and approval by the Securities and Futures Commission, FSC, vice ministers, and the Cabinet meeting, with plans to be implemented on June 16.