Korea

Posted By Steve On Thursday, October 15th, 2009 With 0 Comments

Settlements Cycle

Equities: T+2
Debt: KSE-T or T+1
OTC: negotiable (T+1 to T+30)
Money Market: negotiable
Bond transactions traded in the Government Bonds Inter-Dealer Market (IDM) will settle on T+2 when the Bond settlement date falls on one of the Bank of Korea’s (BOK) reserve dates, the 7th and 22nd of each month.

Over-the-Counter (OTC)
Any foreigner can trade listed stocks through the KRX except in cases such as direct investment, exercise of overseas securities, odd-lot trading, and trading of stocks of stocks which foreign ownership limits have been reached.

Settlement Procedures

Book-Entry:
Trades are pre-matched and a final clearing report is prepared by the KSE and sent to KSD on T+1, after market close. Settlements are completed on a net basis between securities companies. Securities are transferred by book-entry within KSD and funds are transferred through BOK-Wire or accounts at KSD’s correspondent bank on T+2.

On receiving clearing data, the KSD checks the balance of deposited securities of each selling member and receives additional securities to make up for any shortage. The KSD then completes the delivery of securities through book entry by debiting from a net-selling member’s account and crediting to a net-buying member’s account.

At present, the settlement of trades in the Korean Stock Markets occurs on a rolling T+2 cycle. Settlement of securities is carried out on T+2 by exchanging shares through the Korea Securities Depository (KSD) in exchange for funds, usually affected using Bank of Korea (BOK) wire. The settlement of bonds occurs on T or T+1 for trades via the Stock Exchange. Settlement of OTC trades are effected by negotiation between the two contracting parties.

Settlement through INAS (Institutional Affirmation and Settlement)

1. Investor places order with Soeul Broker. Broker places an order into Stock Market (KSE or KOSDAQ)
2. Local broker sends trade contract note to investor.
3. Local broker uploads trade confirmation in KSD via KOSCOM
4. Investor instructs Global Custodian on T or T +1
5. Sub-custodian downloads broker confirmation report from KSD terminal for matching against settlement instructions received from clients by 10:30 on T+1.
6. Global Custodian instructs sub-custodian on T+1 or SD
7. Sub-custodian auto-matches settlement orders against broker confirmation report from T+1 to SD.

Control checkpoint: Check unmatched / alledged trades and advise broker / client for remedial action. Check cash / shares sufficiency
8. Sub-custodian approves (buy & sell) trades in SAFE system by 10:00 on SD

Control checkpoint: Check unmatched trades prior to batch approval in INAS system. Unapproved trades will be settled outside INAS system.
9. KSD sends pre-settlement statement by 10:30 on SD

Control checkpoint: Sub-custodian will calculate funding requirement for all net purchase trades to be settled in INAS system
10. For Buy Transaction: Sub-custodian effects net counter-party payment to KSD through BOK Wire before 16:00 on SD.
11. For Sell Transaction: Local Brokers effect net counter-party payment to KSD through BOK Wire by 16:00 on SD.

Control checkpoint: Sub-custodian to check account with BOK for receipt of payment from KSD.
12. After KSD checks sufficient cash and securities in the participants cash and securities accounts, bilateral settlement will take place.
Control checkpoint: Sub-custodian monitors settlement status through KSD and BOK Wire terminals prior to settlement of trade.
13. Sub-custodian sends MT54X confirmation by 18:00 on SD after settlement of trades in the system.

Registration
Book-Entry: Certificates deposited with KSD are transferred by book-entry. Book-entry shares are registered in KSD’s nominee name. KSD submits a report to the issuer detailing names and addresses of beneficial owners on record date and the issuer advises the beneficial owner of dividends and other notices.

Physical: Physical registration is processed by one of three Korean transfer agents and the turnaround time is one to two days.

Endorsement by the seller is not required with securities registered in the beneficial owner’s name.

Bank for International Settlements Model (BIS):

The KSD’s DVP System operates based on BIS Model 3 – a system in which securities transfers occur on a trade-for-trade (gross) basis throughout the processing cycle. However, fund transfers occur on a net basis at the end of the processing cycle. Security transfers are made via book entry and
are final; fund transfers are irreversible, but not final. Therefore, final transfer of securities precedes final transfer of funds (i.e. delivery precedes payment).

Payment Systems
The most commonly used payment system in the market for securities transactions is BOK-Wire. BOK-Wire is owned and operated by the Bank of Korea. It is an online network that connects the BOK with the financial institutions to allow transfer of funds on a real-time gross basis. It provides settlement finality for almost all transactions, from large-value foreign exchange transactions of banks to interbank settlement of individuals’ small-value ATM transactions. Settlement value through BOK-Wire accounts for around three quarters of all non-cash payments in Korea.

Overdraft Permitted
Overdrafts are not permitted for foreign investors as stipulated in the regulations.

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