Published On: Mon, Jul 7th, 2014

KRX Mandatory CCP Implementation For Clearing Of Korean Won Interest Rate Swap

Kyungsoo Choi, Chairman & CEO, KRX

Kyungsoo Choi, Chairman & CEO, KRX

The Korea Exchange (KRX) commenced a mandatory clearing service for qualified Korean Won denominated interest rate swaps (IRS) contracts between financial investment companies on June 30 2014. The KRX is authorized as a legitimate Central Counterparty (CCP) for the clearing of the Over-The-Counter (OTC) derivatives.

The CCP identifies and fixes the obligations of both parties on either side of a transaction and guarantees the performance of settlement by acting as counterparty against either a seller or a buyer. The CCP reduces total settlement size on the market through multilateral netting. In the case where a financial company goes bankruptcy, the CCP blocks the possible sequential bankruptcies and consequently mitigates substantial risks from OTC derivatives trading.

The Progress of CCP Implementation

A. G20 agreement

Since the global financial crisis in 2008, the G20 leaders have agreed to regulatory reform of the OTC derivatives including the CCP clearing of OTC derivatives trading at the G20 Pittsburgh Summit in November 2009. The G20 also encouraged each country to implement the agreement.

B. Revision of the Act of the Capital Market and Financial Investment Service

In accordance with the G20 agreement, the Korean government has prepared a plan to introduce the CCP and implanted CCP-related regulations into the ACT in April 2013. The government authority also decided to enforce mandatory CCP clearing for Korean won IRS transactions from June 30th 2014 considering international recommendations and the domestic market environment.

C. CCP Licensing

The Financial Service Commission (FSC) authorized the KRX as a CCP for the clearing of OTC derivatives trading on September 11, 2013.

D. Voluntary CCP Service

The KRX has been providing the CCP clearing service for its member financial investment companies since March 3, 2014. Twenty three (23) securities firms and twelve (12) banks have participated in the voluntary CCP clearing service and have cleared 427 transactions which is equivalent to KRW 11.8 trillion during the course of four (4) months.

During this period, no fees were charged for the CCP service and recommendations and ideas raised by financial investment companies were reflected positively to clearing regulations.

E. CCP Registration to Foreign Countries

Prior to the implementation of the CCP, the domestic branches of foreign banks were not permitted to participate in the KRX CCP clearing by their home country regulations. Since receiving this issue from representatives of foreign branches, the FSC and the KRX have made efforts to encourage foreign branches trade actively the Korean Won IRS and make possible their participation in the KRX CCP clearing.

To this end, the FSC has cooperated closely with the regulatory bodies of foreign countries including the U.S. and Europe and notified them of the schedule for introducing the Korean CCP. As a result, the foreign branches were allowed to use the KRX CCP service without any restrictions from their home country regulations.

For an instance, the regulatory authorities of the U.S. and Japan took necessary legal measures including issuance of public notice and revision of relevant regulations. EU regulatory authorities have confirmed that there are special exemption provisions for foreign branches to participate in the Korean CCP.

Recently, the KRX CCP applied for the CCP registration with the EU authorities concerned and the CCP in the registration application process is available for foreign branches of EU banks.

Currently, all financial investment companies that wish to clear Korean Won IRS by themselves joined the KRX CCP as clearing members. Thus, the preparation of mandatory clearing for the OTC derivatives trading was completed.

F. Mandatory CCP clearing of qualified Korean Won IRS commenced on June 30, 2014

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