New Waves in Securities Industry by the CMCA

IT will have been 10 months as of this coming November since the Capital Markets Consolidation Act (CMCA) was enforced. Since then, the financial market has changed in many aspects, especially for brokerage firms and investors. Securities firms have rushed into customer banking and hybrid products, as well as changing their names for the purpose of the Capital Markets Consolidation Act and establishing equity holding companies. Some are focusing on customer service by introducing new financial systems for the next generation.

The government consolidated acts regarding capital markets in terms of brokerage, futures and asset management, in order to strengthen the competitiveness of capital markets and secure investors rights in February 2009. Asset management and future contractions are additionally able to be run with the traditional brokerage business for most equity firms under this Act that established a bridgehead for a birth of globally competitive financial investment companies. Moreover, an intensified safeguard system for investors is another feature of this act. The system means that securities firms need to classify the risk factor of each customer before investment recommendation in order to avoid exaggerated issuances of funds.

It is the most reformative characteristics of this act that has allowed securities firms including equity and futures firm, and asset management companies to operate customer banking services, such as holding deposit and transferring funds, by participating in the Interbank Financial Telecommunication system. The Korean Financial Investment Association established the Interbank Financial Telecommunication system for securities firms six years ago, while the customer banking service of brokerage firms was finally launched last August.

The related law that the Korean Financial Investment Association has promoted for the allowance of customer banking services by securities firms was passed by Parliament in July 2007. The legal evidence of the service has been finally applied to the bill of the CMCA, despite vehement objection from traditional banks.

Securities firms now are able to compete with banks under the CMCA by creating various products. Customers of securities firms can deposit, withdraw, and transfer their funds, as well as pay utility and credit card bills without the need for an associated account from commercial banks. The customer banking service was previously only available at financial institutions,, such as commercial banks, post offices, and saving banks.

Thus, the inevitable competition between securities firms with the newly allowed service, such as Hyundai Securities, Daewoo Securities, Samsung Securities, Korea Investment, Woori Investment & Securities, Mirae Asset Securities, SK Securities, Hanwha Securities, Meritz Securities, Hana Daeoo Securities, HI Investment & Securities, HMC Investment & Securities, Shinhan Investment Corporation, Shinyoung Securities, and Eugene Investment & Securities, and traditional banks who have so far dominated the capital market is expected to heat up.

Enhancing customer services is another area of focus for the competition. HMC Investment & Securities is waiving not only balance transfer payments for the first six months for customers who open a new account or change their associated bank account into a cash management account, but also ATM fees for those using commercial bank cash machines. They are even providing gift certificates to customers. The competition, which is expected to get fiercer, is making the banking sector unstable. Some regional banks are complaining that the new law has pushed regional markets onto the verge of insolvency.

Hybrid products crossing over different financial sectors have been launched continuously after enactment of the law. The lowered barrier between different financial sectors is further agitating competition by creating an attractive combination of investment products, such as equity accounts at commercial banks, adding up credit card mileage depending on equity trading, and lowering insurance rates.

For instance, Samsung Securities issued a new product associated with Samsung Life Insurance, Samsung Fire & Marine Insurance, and Samsung Card. As a customer opens a new CMA account in Samsung Life Insurance, receives a new CMA credit card from Samsung Card, and set the automatic direct payment for insurance bill from the newly opened CMA account, then extra 3% of the insurance bill will be discounted. The total discount rate will be 4% when a 1% benefit for direct payment customers is included.

Although this service is conditioned by the provision that Samsung CMA card need to be payable more than 50,000 won for every three month, it is conceived to be affordable. Large corporations with brokerage subsidiaries will be expected to launch these types of hybrid products.

The banking industry is also introducing intersectional products, such as ‘KB Plustar Account,’ and ‘KB Plustar Save Card’ that are interwoven with a bank account, equity account, and credit card. If you open a new KB Plustar account, you are automatically eligible to be a customer of KB Investment & Securities without the need to open an additional equity account. Furthermore, an additional 4% APR will be given to accounts during the period between the time a buying order for equity trading is received and one day prior to payout day.

In addition, the lending rates of KB Bank will be reduced by up to 0.3% for Plustar Save Card customers, and a maximum of 4% of credit card purchases and 5% of trading fees via Plustar equity account will be stored as financial mileage.

Customers are now able to open Samsung Futures accounts at 900 domestic branches of Woori Bank under a cooperative agreement between the two companies. Newly associated products will be developed soon.

IBK Securities launched on-board derivatives based on interest rate, currency, and commodity (gold, lean hogs) beside equity stocks, for the first time among domestic securities firms. IBK Securities plans to establish an exchange risk management center to provide management services that control the potential exchange risk of the OTC (over-the-counter) market through currency futures trading, especially for small and medium companies, in order to avoid another KIKO shock. ,

The establishment of hedge funds by securities firms is in vogue again. Major securities firms including Daewoo Securities, Hyundai Securities, and Daishin Securities are constructing hedge funds to be established within the first half of next year. Daewoo Securities is aiming at establishing a hedge fund in Hong Kong after launching the Hong Kong IB center. It is said that Korea Development Bank, the parent company of Daewoo Securities, has given permission for the Hong Kong IB center project under condition that the business areas of the Hong Kong Corporation and the IB center do not overlap.

Hyundai Securities will be opening a 100 billion won hedge fund in the first half of next year, as well as Mirae Asset Securities and Hana Daeoo Securities.

The next generation system in the financial market is also expected to expand after the Capital Markets Consolidation Act takes effect. Financial institutions such as saving banks, insurance companies, and securities firms including Dongbu Securities, Meritz Securities, and IBK Securities, are building the next generation system, whilst commercial banks are facing on the ending verge of the installation, in order to embellish the quality of customer service.

More and more financial holding companies are being established. Kookmin Bank, Woori Bank, Shinhan Bank, Hana Bank, and Standard Chartered Korea First Bank have all finished their transitions into becoming holding companies, while Korea Development Bank, Industrial Bank of Korea, and Citibank Korea plan to finish their conversion by the end of this year. This flow is derived from the inevitable strategy for survival in the highly competitive capital market. By establishing a holding company, all sectional barriers among banks, brokerage firms and insurance companies are crumbled, accelerating the development of associated products, and stimulating cooperation among subsidiary financial firms.

The issuance of new equity funds has sharply diminished after the enactment of the law, whereas wrap-accounts are increasing. 218 public equity funds were registered with the Financial Supervisory Service from February through July 2009, a decrease of 73% compared to the 817 recorded during the first half of last year. That means firms have become more circumspect regarding the issuance of new funds.

Meanwhile, wrap accounts, where brokerage firms manage a customer’s portfolio for a proportional fee based on profit, have skyrocketed to 525,259 contracts, valued at 17.8998 trillion won, as of the late July. This has been the biggest change that the Capital Markets Consolidation Act has caused so far.