In the future, mutual investment limited business groups (investment groups) will have restrictions on transaction derivatives based on affiliate bonds. Investment groups with assets of 10 trillion won or more cannot guarantee loans for their affiliates, but some corporations have effectively guaranteed debts through the misuse of derivatives such as total return swaps (TRS). In response, the Fair Trade Commission has established criteria and types for determining illegal activities regarding debt guarantees through derivatives.
The Fair Trade Commission announced on the 23rd that it has established a public notice designating the types and criteria of illegal activities applicable to investment groups. This notice was prepared to prevent the collective insolvency of large corporate groups and excessive concentration of economic power.
According to the public notice, companies belonging to investment groups will be considered illegal if a transaction with financial institutions based on debt securities issued by other domestic affiliates of the same group results in effects similar to debt guarantees. The underlying assets subject to regulation are debt securities, credit-linked securities, and credit volatility.
The Fair Trade Commission has determined that if these three types do not transfer market risk arising from the underlying assets but only transfer credit risk, it would be considered equivalent to a debt guarantee. This means that if the value of the underlying asset fluctuates only due to changes in corporate credit ratings, it would be regarded as a debt guarantee.
Typically, the counterparty of derivative transactions is a financial institution, but the Fair Trade Commission has defined that both the financial institution and special purpose companies (SPC) and investment groups would be illegal if they engaged in such transactions.
However, when convertible bonds (convertible bonds, convertible perpetual bonds, etc.) that have been granted the right to convert into stocks have been converted or are determined to be convertible, the underlying assets do not apply here. The Fair Trade Commission also ruled that derivatives with equity securities or revenue securities as underlying assets are not considered illegal activities because they can expect investment returns due to fluctuations in market value.
The Fair Trade Commission stated, "This public notice will take effect on April 24 of next year after a one-year grace period," and added, "From now on, we will actively block illegal activities that misuse derivatives as a means to evade debt guarantee regulations."