Financial Supervisory Service Begins Sequential Inspections of Securities Firms' 'Bond Rollover' Practices

The Financial Supervisory Service (FSS), which is inspecting the actual management of trust and wrap accounts, announced on the 24th that it will sequentially begin inspections of securities firms selected as targets.

The FSS stated, "As part of the 2023 inspection plan, we selected and announced a thematic inspection on the unhealthy business practices in the wrap and trust markets of securities companies, and have currently started on-site inspections of two companies," adding, "In addition to the two companies currently under inspection, we plan to sequentially begin inspections of other companies previously selected as targets." They also said, "We will take strict measures against any illegal activities confirmed during this inspection to eradicate chronic industry practices and establish market order."

Earlier, the FSS initiated an inspection on the management practices of bond-type wrap accounts and specific money trusts, which are discretionary asset management products of securities firms. The inspection targets are Hana Securities and KB Securities. Allegations have been raised that KB Securities invested in long-term bonds despite stating to customers that they would invest in short-term safe assets, and that in this process, they engaged in self-dealing transactions with Hana Securities.

KB Securities issued a statement the previous day, asserting, "‘Mismatch operation,’ which involves managing assets with maturities longer than the contract period, is not illegal," and added, "We provided prior explanations about this management strategy when customers subscribed to the product, and the customer explanatory document notifies that assets with maturities longer than the contract period may be included and managed." They also stated, "We did not engage in transactions with other securities firms to cover losses," and explained, "In late September last year, when the 'Legoland incident' caused a sharp rise in market interest rates and a tightening of the commercial paper (CP) market, we conducted transactions to supply market liquidity to prevent secondary damage to customers."

The FSS explained the background of the inspection, saying, "If some securities firms present excessive target returns through maturity mismatching, they may dispose of included assets through illegal or irregular methods such as linked transactions to respond to redemptions in case of money market tightening and large-scale contract cancellations." They added, "This could involve transactions between proprietary assets and wrap or trust assets, as well as loss compensation or profit guarantees, which are prohibited by law, hence the inspection was conducted."

An FSS official stated, "Since the second half of 2022, we have closely monitored trends in the wrap and trust markets and any unusual redemption responses. Subsequently, considering basic data such as wrap and trust custody balances, growth trends, yields, and durations by company, as well as market information, we selected companies for inspection and have been conducting on-site inspections since early May this year."

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