After the National Audit, the Financial Investment Inspection Bureau of the Financial Supervisory Service Becomes Even Busier

On the 31st, a Disciplinary Hearing on Rap and Trust Matters Will Be Held

The Financial Supervisory Service's Financial Investment Inspection Bureau is tightening its grip on operations even more strongly following the national audit. It plans to complete sanctions within the year regarding the unhealthy management of securities firms' wrap accounts and specific money trusts (wraps and trusts), which have been controversial since last year, and to accelerate major inspections.

On the 31st, the Financial Supervisory Service will hold the second disciplinary review committee meeting related to unhealthy management of wraps and trusts. The targets are six firms: Korea Investment & Securities, Mirae Asset Securities, Kyobo Securities, Eugene Investment & Securities, SK Securities, and NH Investment & Securities. Previously, the Financial Supervisory Service decided on partial business suspensions of three months and six months for KB Securities and Hana Securities, respectively.

The issue of wrap and trust rollovers surfaced following the 2022 'Legoland incident.' Bond-type wrap and trust products are designed to manage short-term surplus funds for 3 to 6 months. Securities firms, in order to attract institutional or corporate funds, promised high interest rates on wrap and trust products and engaged in 'mismatch' operations by including long-term commercial papers (CPs) with maturities of 1 to 3 years.

As the United States and the rest of the world rapidly raised benchmark interest rates, liquidity in the domestic capital market dried up, resulting in bond losses. At this time, it was discovered that losses were shifted from institutional or corporate accounts to other customer accounts or that proprietary funds were created to cover losses.

The Financial Supervisory Service's disciplinary review will listen to the securities firms' positions on the inspection results and decide the level of sanctions. The Securities and Futures Commission will then make the final sanction decision.

The investigation into Shinhan Investment Corp.'s exchange-traded fund (ETF) financial accident is also a major issue. Currently, fewer than 10 Financial Supervisory Service employees have been dispatched on-site to conduct the investigation. This incident is unusual in that Financial Services Commission Chairman Kim Byung-hwan stated, "Amid ongoing financial accidents such as various embezzlements and fraudulent loans in the financial sector, a large-scale loss recently occurred at Shinhan Investment Corp.," and added, "I hope the Financial Supervisory Service thoroughly inspects and investigates this incident and takes necessary measures based on the results."

Earlier, from August 2 to the 10th of this month, Shinhan Investment Corp. incurred losses amounting to 130 billion KRW while attempting on-exchange futures trading for additional profits during the operation of ETF liquidity providers (LPs). It was revealed that they falsely reported swap transactions during this process. Inside and outside the Financial Supervisory Service, there are views that internal controls were breached. The Financial Supervisory Service also plans to quickly complete the investigation of this incident and proceed with disciplinary procedures.

A Financial Supervisory Service official explained, "The Financial Investment Inspection Bureau must finalize sanctions related to unhealthy management of wraps and trusts by the end of this year and plans to speed up major inspections. The remaining two months will also be a busy schedule."

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