Authorities decided to improve the regulatory framework to manage the liquidity risk of securities firms, whose importance within the financial system has grown. The core is to expand the liquidity ratio regulation—currently applied only to comprehensive financial investment firms with at least 3 trillion won in equity capital and to issuers of derivative-linked securities—to all securities firms, and to introduce a new "adjusted liquidity ratio" that reflects crisis conditions when calculating liquid liabilities and liquid assets so regulators can gauge securities firms' actual liquidity capacity.
The Financial Services Commission and the Financial Supervisory Service on the 18th gave notice of partial amendments to the Financial Investment Business Regulations and the Detailed Enforcement Rules of the Financial Investment Business Regulations.
The Financial Services Commission (FSC) said, "At the end of Sep. 2022, after the 'Legoland incident,' securities firms struggled to raise funds and policy finance institutions moved to provide emergency liquidity support, but each securities firm's liquidity ratio was reported to exceed 100% on paper," and noted, "As the scope of business and systemic importance of comprehensive financial investment accounts (IMA) and short-term notes at comprehensive financial investment firms have expanded, the need for more sophisticated liquidity risk management at securities firms is growing."
With the system overhaul, all 49 securities firms will be required to comply with liquidity regulations. Until now, only 10 comprehensive financial investment firms and 13 issuers of derivative-linked securities were subject to regulations requiring them to maintain one-month and three-month liquidity ratios of at least 100%, respectively. The Financial Services Commission (FSC) said, "Liquidity risk management across the entire securities sector, including small and midsize firms, is expected to be further strengthened."
In addition, authorities decided to apply haircuts that account for price volatility risks during crises when calculating liquid assets. Government bonds, special-purpose bonds, bank bonds, AAA-rated bonds, and physically backed government bond ETFs will not be subject to haircuts, but assets with higher investment risk than these will be subject to haircuts when computing liquid assets.
Specifically: ▲ AA-rated bonds 7% ▲ A-rated and below bonds 10% ▲ stocks, foreign-currency securities, open-ended funds, ETFs (excluding physically backed government bond ETFs and synthetic ETFs) 15% ▲ synthetic ETFs 30%.
The aim is to tighten regulations to reflect the reality that, when a crisis occurs, prices of risky assets such as stocks or funds fall, reducing securities firms' liquidity capacity.
Contingent liabilities, such as debt guarantees, will also be added to liquid liabilities. Contingent liabilities will be categorized into refinancing-issued securities and loan or equity commitment agreements so that expected future cash outflows are reflected in liquidity management.
Alongside this, the calculation standards will be updated to reflect the actual risks of liquid assets and liquid liabilities. The Financial Services Commission (FSC) explained that, among the assets held by securities firms, for funds (collective investment securities), open-ended funds such as ETFs will have their liquidation period calculated based on the time required for redemptions, while closed-end funds such as real estate funds will have it calculated based on remaining maturity.
After the notice of regulatory changes and the development of securities firms' systems, the amended rules are slated to take effect in Jan. next year.
Regulations on risk management for securities firms are set to be strengthened further. Authorities said, "To strengthen securities firms' real estate risk management, we are pursuing amendments related to tougher risk weights in the real estate net capital ratio (NCR) and the introduction of an aggregate investment cap," and added, "We also plan within the year to prepare differentiated capital regulations for comprehensive financial investment firms whose scope of business has expanded."