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)

KOREA TREASURY BOND Interest rate continues to decrease in 2010 7.0% 3yr 5yr 10yr 20yr 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% '09.01.02 '09.04.02 '09.07.02 '09.10.02 '10.01.02 '10.04.02 '10.07.02 '10.10.02 2

KOREA TREASURY BOND Increase of Foreign Holdings after 2009.1H (trn Won) 12.4% 50 14% 11.1% 12% 40 9.4% 9.2% 10% 8.4% 7.0% 30 8% 6.4% 6% 20 4% 10 2% 0 0% 2007 2008 2009.1H 2009.2H 2010.1Q 2010.2Q 2010.3Q 3

KOREA TREASURY BOND Residual maturity of foreign investor ’ s holding 50 50 ~ 1yr 1~3yr 3yr~ 45 45 40 40 42% 35 35 30 30 25 25 26% 20 20 15 15 10 10 5 39% 9% 0 2007 2007 2009 2009 2010.3 2010.6 2010.9 4

1. Omnibus Account at ICSD ICSDs agreed to establish Omnibus Account for KTB investments  Euroclear: Omnibus Account opened and activated in September, 2009  Clearstream: Omnibus Account opened and activated in February, 2010 What does this mean for foreign Investors…. 1. Exemption on Investment Registration Certificate (IRC) 3. Over-the-Counter trade* 2. Exemption on local- among Foreign Investors custodian account 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)  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 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) What does this mean for foreign Investors….  Foreign investors can freely borrow KRW for KTB investments from Korean banks as long as their credits are good

3. Conversion of Foreign Currency into KRW Foreign Investors can freely buy KRW at any time without purchasing underlying security  Today (since Dec. 2007)  Before Can buy KRW at any time Can buy KRW only after the final investment decision has been made 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..

4. Exemption From Withholding Tax for Foreign Investors Foreign Investors are exempted from withholding tax on interest income and capital gains  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….  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%)

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