Changes to the Korean Collective Investment Market since the implementation of Financial Services and Capital Markets Act(FSCMA)

      Roughly a year has passed since the implementation of the Financial Services and Capital Markets Act. One of key amendments was the switch from a positive-list regulation to a negative-list comprehensive system in defining financial products. Before the implementation, only 21 financial items such as securities, government & corporate bonds and mortgage-based securities were eligible to be the underlying assets. However, the all-inclusive system has enabled financial firms in broadening the coverage of derivatives products to basically everything with an investment value – underlying assets which include not only financial investment products, FX and commodities but credit risks, and any other natural, environmental risks and value.

     The idea behind this change was to increase opportunities in capital markets through innovation and diversity. The role of financial firms was to design and develop diverse financial products providing a wider range of choices in investing options for perspective investors. The 229th clause of the FSCMA act classifies the types of collective investment to five categories, downsized from the previous seven. They are equity-based funds, real estate funds, hybrid funds, money market funds and special asset funds. Before Financial Services and Capital Markets Act were in place, the seven classified funds’ underlying assets had to be solely based on its classification. However, FCMCA lifted its boundaries to 50% for equity based funds, real estate funds and special asset funds and introduced a new concept, hybrid fund, which had no such limitation.

Here are a number of new collective investments that have emerged since the capital market consolidation act.

“Hi Gold Special Asset Fund”

  Hi Asset Management’s gold special asset fund invests approximately 95% of its assets on ETFs that have gold spot prices as its underlying assets.

Shinhan Financial Group’s Mezzanine Fund

Shinhan Financial Group has introduced Mezzanine fund. Mezzanine is an architectural term connoting an intermediate floor between two main floors of a building. Similar to its structure, the funds invests solely in Convertible Bonds (CB) and Bonds with Warrants (BW).

Carbon Emission Trading Fund

Tong Yang Securities carbon emission trading fund invests primarily on futures and ETFs of foreign carbon emissions market.

 Samsung Securities WTI Oil derivatives Fund

Samsung Securities WTI Oil derivatives fund invests primarily on derivatives that have oil as its underlying asset.

 

     In addition to this, there are currently 23 funds linked exclusively to agricultural goods and Korean Beef. Small and mid-sized firms with promising business opportunities have been provided with a new method in gaining investment capital, funds. Currently, there are funds related to imports, funds investing in motion pictures and many more. The collective investment market also witnessed new introductions of ETF. Before FSCMA implementation, only equity-based ETF were available, but with the boundaries lifted, diverse products such as inverse ETF, SRI ETF and Treasury bond ETF were launched.

                   Korean Fund Market as of Feb 2010 

                                                              Korea Financial Investment Association

Investor protection

With so many ranges of funds, underlying assets out in the market, a main concern for the Financial Services Commission was to insure that proper investor protection was in place. For these reasons, investors are categorized into five groups based on their age, investment experience, income and risk-taking styles; so that financial companies are guide the right investment for each investor. Industry experts say the global economic crisis led to tighter regulation, limiting the impact of the act. But with the Korean economy regaining momentum and as the Korean pension fund widens its horizon; we are likely to see a healthy growth in the collective investment market.

By Shin, Dong Hoon (donghoon83@hotmail.com)

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6 Responses to Changes to the Korean Collective Investment Market since the implementation of Financial Services and Capital Markets Act(FSCMA)

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