Securities Firms Expanding Overseas Territories... "Advanced Strategies and Regulatory Cooperation Essential"

Overseas expansion by securities firms, which had slowed down after COVID-19, is regaining momentum. As 40 years have passed since domestic securities firms first ventured abroad, their achievements are gradually becoming visible. However, the overseas segment still accounts for a relatively small portion of the overall performance of securities firms. Experts suggest that to further strengthen their presence in overseas markets, domestic securities firms need to diversify their business models and enhance their overseas expansion strategies.

According to the Korea Capital Market Institute on the 5th, as of March last year, domestic securities firms had 69 overseas branches in 13 countries. The total number of overseas branches of domestic securities firms has generally been declining since 2011. The number of overseas branches decreased from 96 in 2011 to 64 in 2020, then slightly increased again to 69.

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This change in the number of overseas branches reflects shifts in target markets. While branches in developed countries decreased, those in emerging markets increased. The number of local subsidiaries in developed countries dropped from 41 in 2011 to 31 in 2022, whereas in emerging countries, local subsidiaries increased from 19 in 2010 to 25 in 2022.

Choi Soon-young, a research fellow at the Korea Capital Market Institute, explained, "Domestic securities firms had mainly entered developed markets focusing on Korean bond brokerage but did not achieve significant results. Based on this experience, they have been actively establishing local subsidiaries in Asian emerging countries with high capital market growth potential, such as Vietnam and Indonesia. Domestic securities firms are focusing on retail brokerage as their main business in these emerging Asian markets and have achieved some success."

While domestic securities firms are working to solidify their positions in emerging markets, they are also diversifying their business areas in developed countries to aggressively target overseas markets. Mirae Asset Securities acquired Sharekhan Limited, a local Indian securities firm, for 480 billion KRW in December last year. After entering the Indian capital market in 2018 as the first domestic securities firm, Mirae Asset Securities acquired a local company five years later. Sharekhan ranks around 10th in the local industry, and Mirae Asset Securities aims to become one of the top five securities firms in India within five years through this acquisition. The number of retail customer accounts at Mirae Asset Securities' India branch surpassed 1 million in January this year. Since launching the online trading platform 'm.Stock' in April 2022, Mirae Asset Securities India has rapidly risen to 8th among local online securities firms and 16th overall, establishing itself as the fastest-growing securities firm in India. Since establishing its India branch in 2018, Mirae Asset Securities increased its equity capital to 450 million USD (approximately 600 billion KRW) through a capital increase in early May last year, strengthening its brokerage business locally through aggressive online marketing.

Korea Investment & Securities entered the U.S. acquisition finance and private lending sectors through 'SF Credit Partners,' a joint venture established last year with U.S. financial firm Stifel Financial. Additionally, through a strategic partnership with global asset manager The Carlyle Group, it plans to exclusively sell Carlyle credit products worth 4 billion USD annually in Korea. In December last year, Korea Investment & Securities became the first domestic securities firm to list derivative warrant products on the Hong Kong Stock Exchange. Earlier this year, it established the Global Business Office within Korea Investment Holdings and upgraded the Global Business Headquarters in securities to a group level, aiming to increase the proportion of global products in individual assets to 30% by 2030.

NH Investment & Securities recently launched a new mobile trading system (MTS) in Vietnam and plans to develop its local subsidiary into a digitally leading securities firm. It also plans to introduce next-generation systems in the future.

Research fellow Choi said, "The overseas expansion front of domestic securities firms covers both developed and emerging countries, and their business models are diversifying. There is a need to refine overseas expansion strategies and for efforts by the financial industry and authorities to support overseas expansion."

Although domestic securities firms are actively targeting overseas markets, they face various challenges. Operating abroad often means encountering numerous local barriers. Domestic securities firms say that easing local regulations and strengthening networks are crucial for activating overseas business. They emphasize the role of financial authorities in resolving these difficulties.

A typical challenge faced by local subsidiaries is capital expansion. Capital and funding capabilities are critical factors determining the success of overseas business. However, most local subsidiaries, which are not sufficiently large, struggle to raise funds independently. This is why most local subsidiaries rely on the creditworthiness of their parent companies to bolster capital. Increasing capital requires approval from local financial authorities, and the lengthy approval process is another obstacle. Even when business strategies are planned to respond to market changes, funding bottlenecks prevent timely responses.

Local regulatory barriers often block business opportunities. A representative example is domestic securities firms having direct trading systems for Indian stocks but being unable to launch the service. Mirae Asset Securities and NH Investment & Securities planned to launch direct trading services for Indian stocks to meet demand but had to abandon these plans due to local tax regulations. Currently, under tax treaties with other countries, Korean investors pay capital gains tax in the country with the higher tax rate when trading U.S. and Japanese stocks. However, the Indian government insists that taxes must be paid locally unconditionally. This means that since capital gains vary widely per individual, taxes must be assessed separately for each person. Due to these regulations, the only option for investing in the Indian market from Korea is Indian-related exchange-traded funds (ETFs). The financial authorities promised to resolve this issue by February, but no progress has been confirmed so far.

A representative from a major domestic securities firm said, "There are hardly any domestic regulations hindering overseas expansion. The problem lies in double taxation and other regulations imposed by local authorities abroad. The authorities' overseas networks are important. If the authorities take the lead in opening channels to discuss related regulations and expansion issues with local authorities, it would greatly help companies."

One measure taken by financial authorities in response to requests from domestic securities firms is the relaxation of the Net Capital Ratio (NCR) regulation on corporate credit extensions by overseas subsidiaries of comprehensive financial investment business operators (CFIBOs). Increasing the scale of corporate credit extensions by CFIBO overseas subsidiaries lowers risk weights, thereby expanding credit extension capacity. This enables firms to actively engage in risk investments without hoarding cash.

A financial investment industry official said, "We have repeatedly requested that the same NCR deduction rates applied to headquarters be applied to local subsidiaries' acquisition financing and credit extensions. Since October last year, all overseas local subsidiaries, which were previously excluded from CFIBO credit extension standards and subject to a 100% deduction rate, have benefited from this change, aiding the activation of local subsidiary businesses."

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