Securities Industry Opposes ELS Regulations: "Concerns Over Market Contraction"

Financial Services Commission Reviewing Multiple Issues Including Total Issuance Cap...Securities Industry Expresses Fatigue Over Frequent Regulations

[Asia Economy Reporter Geum Bo-ryeong] The Financial Services Commission (FSC) is causing tension in the securities industry as it begins reviewing various regulations, including a total issuance cap system that sets limits on the issuance amount of equity-linked securities (ELS) by each securities firm. There are concerns that the total issuance cap could significantly shrink the market.

According to the financial investment industry on the 19th, the FSC is reportedly seriously considering introducing a 'total issuance cap system' to stabilize the ELS market. This means preventing securities firms from issuing ELS beyond their own capital.

The FSC's move to consider ELS regulations stems from the large-scale margin call incident that occurred in March. The global stock market crash triggered by the novel coronavirus disease (COVID-19) caused futures prices to fall below contract levels, leading to margin calls. When some securities firms struggled to respond to margin calls due to a shortage of dollars, the Bank of Korea intervened by purchasing repurchase agreements (RPs) from non-bank institutions.

The securities industry is expressing concerns about 'excessive regulation.' A securities firm official emphasized, "Purchasing foreign currency to secure large-scale futures margin by selling short-term bonds during a stock market crash mainly occurs as part of domestic securities firms' own hedging process for ELS, so reducing the total issuance volume of ELS is not an accurate solution but rather excessive regulation." Another securities executive said, "Since securities firms were already shocked by the COVID-19 volatility, they can now adjust on their own, but the government is trying to put shackles on them."

There are also concerns about potential market contraction. Another securities industry official stated, "Large-scale margin call incidents are more related to securities firms' management methods than to ELS themselves, so limiting the issuance volume of ELS products can be interpreted as an intention to eliminate the market itself." He added, "If total issuance regulation is imposed based on own capital, ELS fees will inevitably worsen. This will limit investors' opportunities and reduce the attractiveness of ELS products."

The securities industry is also voicing fatigue over frequent regulations. On the previous day, the 18th, the FSC announced a comprehensive plan for the exchange-traded product (ETP) market. A financial investment industry official criticized, "Financial authorities respond by shutting off the faucet whenever an incident occurs. If regulations block business in certain areas, it is as if there is no growth process. The industry just ages and grows in size but ends up unable to do anything meaningful." Another securities firm official lamented, "The vicious cycle of regulation, contraction, and disappearance when problems arise is interpreted by the public as a message to just keep deposits."

This content was produced with the assistance of AI translation services.