Liquidity Ratio Regulation to Be Expanded to All Securities Firms... New Standards Introduced

Strengthening Liquidity Risk Management Across the Securities Industry, Including Small and Mid-Sized Firms
Introduction of the 'Adjusted Liquidity Ratio'... Implementation Set for 2027
Application of Haircuts and Inclusion of Contingent Liabilities

The financial authorities are expanding the liquidity ratio regulation—which previously applied only to comprehensive financial investment business entities (CFIBs) and issuers of derivative-linked securities—so that it now covers all domestic securities firms. Additionally, a new 'Adjusted Liquidity Ratio' will be introduced, with more sophisticated calculation standards to ensure firms can respond even in crisis situations.

The Financial Services Commission and the Financial Supervisory Service announced on May 18 that they are pushing to amend the 'Regulation on Financial Investment Business' and its enforcement rules to strengthen liquidity management among securities companies. Regulatory amendments will be sequentially pre-announced starting this month, with full implementation scheduled for January 1, 2027, after the regulatory process and related system upgrades at each securities firm are completed.

First, the liquidity ratio regulation (liquid assets ÷ liquid liabilities) will be expanded to all 49 securities firms. Under the current regime, only CFIBs (10 firms) and issuers of derivative-linked securities (excluding CFIBs, 13 firms) are required to maintain both the one-month and three-month liquidity ratios at 100% or higher.

A Financial Services Commission official stated, "As the business scope and systemic importance of CFIBs—such as investment management accounts (IMA) and note issuance—have continued to expand, there is a growing need for more sophisticated liquidity risk management." The official added, "Liquidity risk management will be further strengthened across the entire securities industry, including small and mid-sized firms."

The introduction of the Adjusted Liquidity Ratio will also refine the standards for liquidity ratio calculation. Currently, in cases of market stress where forced selling occurs, illiquid assets that are prone to significant losses are not subject to any haircuts, and contingent liabilities such as debt guarantees are not reflected in liquid liabilities. This has made it difficult to assess liquidity resilience in crisis scenarios.

Accordingly, a haircut that takes into account price volatility during crises will be applied to the numerator—liquid assets—of the current liquidity ratio. The haircut rates are as follows: 0% for government and public bonds, special bonds, bank bonds, AAA-rated bonds, and physically-backed government/public bond ETFs; 7% for AA-rated bonds; 10% for bonds rated A or below; 15% for stocks, foreign securities, open-ended funds, and ETFs (excluding physically-backed government/public bond ETFs and synthetic ETFs); and 30% for synthetic ETFs.

Meanwhile, the denominator—liquid liabilities—will be augmented by adding contingent liabilities such as debt guarantees. Contingent liabilities are divided into refinancing securities and loan/investment commitments. For refinancing securities, either 16% (A1) or 60% (A2 or lower) depending on the firm's short-term credit rating, or the higher of these rates and the firm’s average debt guarantee execution rate over the past year, will be multiplied by the outstanding balance and added to liquid liabilities according to the remaining maturity. For loan and investment commitments, where immediate cash outflows may occur, the entire outstanding balance will be added to the one- and three-month liquid liabilities.

In addition, calculation standards will be adjusted to better reflect the actual risks of liquid assets and liabilities. For open-ended funds such as ETFs, the liquidity period will be calculated based on the redemption period, while for closed-end funds such as real estate funds, the period will be based on the remaining maturity.

Furthermore, the financial authorities are working on amendments to strengthen risk management for real estate investments by securities firms, including enhancements to the real estate NCR risk value and the introduction of an overall investment cap. These changes were pre-announced in December last year. For CFIBs, differentiated capital regulations compared to ordinary securities firms are also under review, with specific plans to be prepared within this year.

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