Non-resident participation in domestic market KOREA Washington, Oct - - PowerPoint PPT Presentation

Non-resident participation in domestic market KOREA

Washington, Oct 2010 SungCheol Kim (kimsc@mosf.go.kr)

Deputy Director, Government Bond Policy Division

Treasury Bureau, Ministry of Strategy and Finance Republic of Korea (http://english.mosf.go.kr)

2

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% '09.01.02 '09.04.02 '09.07.02 '09.10.02 '10.01.02 '10.04.02 '10.07.02 '10.10.02

3yr 5yr 10yr 20yr

KOREA TREASURY BOND

Interest rate continues to decrease in 2010

3

KOREA TREASURY BOND

Increase of Foreign Holdings after 2009.1H

(trn Won)

9.2% 7.0% 6.4% 8.4% 9.4% 11.1% 12.4%

10 20 30 40 50

2007 2008 2009.1H 2009.2H 2010.1Q 2010.2Q 2010.3Q

0% 2% 4% 6% 8% 10% 12% 14%

4

KOREA TREASURY BOND

Residual maturity of foreign investor’s holding

5 10 10 15 15 20 20 25 25 30 30 35 35 40 40 45 45 50 50 2007 2007 2009 2009 2010.3 2010.6 2010.9 ~ 1yr 1~3yr 3yr~

26% 39% 9% 42%

• 1. Omnibus Account at ICSD

ICSDs agreed to establish Omnibus Account for KTB investments What does this mean for foreign Investors….

• 1. Exemption on Investment

Registration Certificate (IRC)

• Euroclear: Omnibus Account opened and activated in September, 2009
• Clearstream: Omnibus Account opened and activated in February, 2010
• 2. Exemption on local-

custodian account

• 3. Over-the-Counter trade*

among Foreign Investors allowed

* Foreign investors who invest through omnibus accounts at ICSD can trade in the international OTC market among themselves

• 2. KRW Borrowing for Security Investment

Amount of KRW borrowing required to report to BOK is increased from KRW10bil to KRW30bil (Dec.2007) What does this mean for foreign Investors….

• As previous “Banking Act” did not allow loans for “speculation” purpose, however,

banks find it restrictive to lend out KRW to foreign investors for investment purpose

• Foreign investors can freely borrow KRW for KTB investments from Korean banks

as long as their credits are good Banking Act “Article 38” (Prohibited Business) No financial institution sha hall eng engage in any of f the he fo follo llowing activ iviti ties: 4.

• 4. Lo

Loans of f fun funds to specu eculate te in commoditi ties or r secu ecurities

• New Banking Act eliminated the restriction on KRW borrowings for speculation purpose

(revised in May 2010, implemented in Nov. 2010)

• 3. Conversion of Foreign Currency into KRW

Foreign Investors can freely buy KRW at any time without purchasing underlying security What does this mean for foreign Investors….

• Foreign investors can convert foreign currencies into KRW at any time before investment

 Helps to manage FX risks better..

• Before

Can buy KRW only after the final investment decision has been made

• Today (since Dec. 2007)

Can buy KRW at any time

• 4. Exemption From Withholding Tax for Foreign Investors

Foreign Investors are exempted from withholding tax on interest income and capital gains

• Foreign investors can expect higher returns on KTB (On average 50 ~ 70bps per annum)
• 50 ~ 70 bps = Avg KTB rate (5.02%) * withholding tax rate (10~14%)
• Income Tax Act and Corporate Tax Act amended on April 30, 2009
• Exempted Investments: 1. Direct Investment 2. Investment through QFI
• Exempted Securities: Any outstanding and newly issued KTBs
• Apply to the investment paid or transferred after May 21, 2009

What does this mean for foreign Investors….

Withholding Tax Exemption Application Examples of Qualified Foreign Intermediaries (QFI)

• Direct Investment: Foreign Investors need to apply for exemption
• Investment through QFI: QFI needs to apply for exemption on behalf of individual investors
• Foreign Securities Depository Institutions or Settlement Institutions
• International Central Securities Depository
• Global Custodians
• 4. Exemption From Withholding Tax for Foreign Investors