[Reform Plan for Securities Firms①] "25% of Issued Commercial Papers to Venture Capital"

Financial Services Commission Announces "Plan to Enhance Corporate Finance Competitiveness in the Securities Industry"
Scope of Corporate Credit Extension... "Expanded to Include Restructuring and Mid-Sized Companies"
"25% of Commercial Paper Issuance Must Be Supplied as Venture Capital by 2028"

A new regulation mandating the supply of venture capital to comprehensive financial investment business operators has been introduced, and the scope of corporate credit extension will be expanded to include restructuring and mid-sized companies. The financial authorities have decided to overhaul the system significantly in response to criticisms that domestic comprehensive financial investment firms have business structures similar to general securities firms and that their corporate finance operations have been concentrated on real estate project financing (PF), deviating from the original intent of "inducing venture capital supply."

On the 9th, Kim Byung-hwan, Chairman of the Financial Services Commission, held a meeting with CEOs of 10 comprehensive financial investment firms at the Korea Financial Investment Association in Yeouido, Seoul, and announced the "Plan to Enhance Corporate Finance Competitiveness in the Securities Industry," focusing on improving the comprehensive financial investment firm system with the above content.

The comprehensive financial investment firm system was first introduced in 2013. Its purpose is to activate the supply of venture capital to innovative companies. When designated as a comprehensive financial investment firm, securities companies can launch new businesses based on their own capital. Firms with over 3 trillion KRW in capital can extend corporate credit, those with over 4 trillion KRW can issue commercial papers, and those with over 8 trillion KRW can open integrated investment accounts (IMA). However, contrary to the intent of "inducing venture capital supply," securities firms have been criticized for using the comprehensive financial investment firm system mainly for real estate PF or equity-linked securities (ELS).

The Financial Services Commission plans to reform the overall operational regulations of comprehensive financial investment firms, including corporate credit extension and commercial paper issuance, to actively supply corporate finance and venture capital. Chairman Kim Byung-hwan said, "As the scope of the securities industry expands through overall system improvements, I hope comprehensive financial investment business operators will demonstrate innovation befitting this change," adding, "it is necessary to enhance the qualitative competitiveness of corporate finance, analyze and support listed companies for value-up, and lead value-up as listed companies themselves."

◆ Venture Capital Supply 'Mandated' and Credit Extension Scope 'Expanded'

First, the scope of corporate credit extension for comprehensive financial investment firms with over 3 trillion KRW in capital will be expanded. Unlike general securities firms, comprehensive financial investment firms could extend credit up to 100% of their capital plus an additional 100% (limited to small and medium enterprises and IB operations). This will be improved to apply also to special purpose companies (SPCs) depending on the final purpose of fund supply. Additionally, credit extension will be allowed for mergers and acquisitions (M&A) refinancing, restructuring, mid-sized companies, and win-win settlement. However, financial companies not directly related to corporate fund supply will be excluded by adjusting the scope of corporate credit extension.

It is planned to mandate that 25% of funds raised through commercial paper issuance be supplied as venture capital. Currently, comprehensive financial investment firms with over 4 trillion KRW in capital can raise funds up to 200% of their capital through commercial paper issuance. The raised funds must be operated with at least 50% allocated to corporate finance and no more than 30% to real estate.

However, the proportion invested in venture capital was extremely low. As of September last year, among the four domestic comprehensive financial investment firms authorized to issue commercial papers, the proportion of venture capital in total assets was 2.51%, while the other five firms had a proportion of only 2.05%. In contrast, the proportion of debt guarantees (real estate PF) in investment banking (IB) revenue of comprehensive financial investment firms was 48.4% last year. The Financial Services Commission explains that there is a need to expand venture capital supply to support innovative economic growth.

The Financial Services Commission plans to gradually increase the proportion of venture capital supply to 10% in 2025, 20% in 2027, and 25% in 2028. Venture capital includes fund supply and equity investment in small and medium-sized enterprises and mid-sized companies, debt securities rated A or below, purchases of primary collateralized bond obligations (P-CBO), win-win settlements, and investments in venture capital (VC), new technology companies, and high-yield funds. Conversely, the real estate allocation will be reduced from the current 30% to 10% by 2028.

The scope of dedicated brokerage services for comprehensive financial investment firms will also be expanded. Dedicated brokerage services refer to asset management, securities lending, total return swaps (TRS), and other services provided to institutional investors such as dedicated brokerage funds. Currently, comprehensive financial investment firms with over 3 trillion KRW in capital can provide dedicated brokerage services to funds, private equity funds (PEF), and pension and mutual aid funds. This will be improved to allow similar services for entities that are not classified as funds under the Capital Markets Act but are substantively similar, such as VCs, REITs, and new technology associations.

◆ Strengthening Designation Requirements for Comprehensive Financial Investment Firms: "Must Meet Requirements for 2 Consecutive Years"

Comprehensive financial investment firms are designated after reviewing capital, internal control, and conflict of interest prevention systems. The Financial Services Commission plans to strengthen designation requirements and apply a phased designation principle from this year onward. Due to growth in the securities industry, there is demand for firms with 4 trillion KRW capital authorized to issue commercial papers and 8 trillion KRW firms authorized to conduct IMA operations. There have also been opinions that some existing designation requirements need to be revised and systematized.

The most critical requirement, capital, must be met for two consecutive periods based on year-end financial statements. Since new businesses equivalent to licensing are possible upon designation as a comprehensive financial investment firm, new requirements for business plans and personal sanction history (social credit) will be introduced. For firms designated with 8 trillion KRW capital, a major shareholder requirement equivalent to a change approval will be introduced. Additionally, comprehensive financial investment firms will be allowed to gradually expand their corporate finance functions. Firms will be designated at each stage?3 trillion KRW, 4 trillion KRW, and 8 trillion KRW?after operating for more than two years at the previous stage.

However, considering the preparations made by the securities industry so far, applications for 4 trillion KRW and 8 trillion KRW comprehensive financial investment firms will be accepted in the third quarter of this year and designated according to existing requirements. Currently, securities firms with capital over 8 trillion KRW are Mirae Asset Securities and Korea Investment & Securities, while those with over 4 trillion KRW include Meritz Securities, Hana Securities, Shinhan Investment Corp., and Kiwoom Securities.

In addition, incentives will be provided for securities firms' overseas expansion, and system improvements will be made to manage the soundness of derivative-linked securities and bonds. In June this year, detailed plans to strengthen the soundness and liquidity management of securities firms' real estate assets and directions for reforming the soundness system of comprehensive financial investment firms will be prepared and announced.

Chairman Kim Byung-hwan explained, "The key to maintaining vitality and achieving sustainable growth in our mature economy lies in the capital market," adding, "The securities industry, which plays a central role in the creation and development of the capital market, will be enabled to take on a greater role centered on corporate finance."