FSS Urges Securities Firms to Strengthen Risk Management for Overseas Private Debt Funds

The Financial Supervisory Service has urged securities firms to strengthen their risk management of overseas private debt funds.

On March 4, at the ‘Overseas Private Debt Fund Securities Firms Meeting’ held at the Korea Financial Investment Association in Yeouido, Seoul, the Financial Supervisory Service delivered this message to 20 participants, including executives in charge of overseas private debt funds at 10 securities firms.

Kim Ukbae, Deputy Governor of the Financial Supervisory Service, stated, “In relation to overseas private debt funds, it is necessary to establish contingency plans in advance and further enhance the risk management system. It is also important to proactively prepare for potential risks by conducting soundness analyses by major industry sectors and to re-examine liquidity risk management strategies.”

He also emphasized investor protection. Deputy Governor Kim said, “Securities firms must strengthen information-gathering systems regarding market conditions so that investors can be promptly informed about risk factors, and thoroughly review the sales process to ensure that product explanations do not contain misleading statements that could confuse investors.”

This request comes as the balance of overseas private debt fund sales continues to grow and market uncertainty increases amid the global situation, including the war between the United States and Iran and instability in the overseas private debt market. According to the Financial Supervisory Service, the balance of overseas private debt fund sales to domestic investors was KRW 1.18 trillion in 2023, KRW 1.38 trillion in 2024, and KRW 1.7 trillion last year, showing steady annual growth.

Deputy Governor Kim explained that there are three risk factors associated with these funds: lack of transparency of information, underestimation of risk, and limitations to domestic control.

Due to the nature of these funds, it is difficult to assess the deterioration of the creditworthiness of each borrower. This is because they offer loans under more relaxed conditions compared to conventional financial institutions. In addition, as risks are mostly assessed based on price volatility, risk levels are often underestimated. Furthermore, since the investments are made in a re-indirect format in overseas private debt funds, there are limitations to the involvement of domestic financial firms in areas such as loan selection.

The Financial Supervisory Service plans to monitor trends in overseas private debt fund sales and compliance with investor information obligations, and will review financial companies’ risk management systems to ensure they are operating effectively.

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