"Foreign Currency Stock Trading and Custody Amounts Increasing Daily"…Ensuring Full Protection of Investors' Foreign Currency Deposits

Foreign securities custody amount. Data from Korea Securities Depository

[Asia Economy Reporter Lee Seon-ae] With the enforcement of the amendment to the Foreign Exchange Transaction Regulations on the 19th, it will become clear that foreign currency deposits must be mandatorily deposited with designated institutions, thereby enhancing the safety of foreign currency deposits.

According to the financial investment industry on the 17th, foreign currency deposits have so far been deposited either with Korea Securities Finance Corporation or foreign exchange banks at the discretion of securities firms. However, in the case of foreign currency deposits held at foreign exchange banks, safety was not guaranteed against credit risks such as the bankruptcy of securities firms, and even if protected under the Depositor Protection Act, protection could not be extended to foreign currency deposits exceeding the coverage limit. Accordingly, there have been strong calls to amend the Foreign Exchange Transaction Regulations to clearly mandate the deposit of foreign currency deposits with Korea Securities Finance Corporation. As domestic investors, known as so-called Seohak Gaemi, have been trading overseas stocks at an unprecedented rate and the amount of foreign securities custody has been continuously reaching record highs, financial authorities have also felt the need to establish safety measures for foreign currency deposits. The amendment to the Foreign Exchange Transaction Regulations is the solution proposed.

According to the new regulation, securities firms must deposit up to 70% of the dollar-denominated foreign currency deposits received from investors with designated institutions. However, the remaining 30% may be temporarily deposited with foreign exchange banks until the end of 2024. Experts emphasize that stronger and clearer regulations and enforcement are necessary going forward to ensure the mandatory deposit of foreign currency deposits.

Kang Hee-joo, President of the Korea Securities Law Association (Attorney), stated, "Around the time of the foreign exchange crisis, when the investment funds invested by customers in overseas investment destinations matured and were repaid, the funds were normally repaid up to the Korea Securities Depository. However, during the process of transferring the repaid investment funds (payment for financial investment products) to the customers' accounts opened at domestic securities firms, the payment was suspended due to the bankruptcy of the securities firm." She added, "Although some of the investment funds were recovered through lawsuits and negotiations with the securities firm, it must have been a frustrating experience for investors at the time." She further explained, "If the concentration of deposits with Korea Securities Finance Corporation is more clearly stipulated in the Foreign Exchange Transaction Regulations, it will greatly help alleviate concerns about gaps in the protection of overseas stock investors' funds."

With the expansion of Korea Securities Finance Corporation’s foreign currency deposit management methods, it is expected that investors’ profit securing will also be thoroughly ensured. The existing methods for managing foreign currency deposits were limited to foreign currency deposits and foreign currency PR. As the scale of foreign currency deposits expands, efficient management is impossible with the current limited methods. Therefore, Korea Securities Finance Corporation proposed to financial authorities to utilize general foreign currency management instruments (foreign currency call loans, foreign exchange swaps, foreign government bonds, etc.) for foreign currency deposits. This time, U.S. Treasury bonds and foreign exchange swap transactions were added as management methods for institutions holding foreign currency investor deposits. The scope of bonds eligible for conditional purchase was also expanded from existing government bonds, local bonds, special bonds, and bonds rated A or higher by domestic credit rating agencies to include bonds rated A or higher by international credit rating agencies.

Korea Securities Finance Corporation expects that the expansion of management instruments will improve the yield on foreign currency deposits while enabling efficient management of their volatility, significantly contributing to stable deposits (protection of foreign currency deposits) and management (securing investor profits).

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