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South Korea's financial derivative markets are evolving rapidly. In line with this, the Financial Supervisory Commission (FSC) and the Financial Supervisory Service (an executive body of the FSC), are seeking to relax the regulations on credit-derivative transactions (CDTs) by financial institutions. Korea's credit derivative market is expected to continue expanding, with such products recognized as useful tools to reduce credit risks under the new Basel Capital Accord (Basel II), which is scheduled to be implemented in Korea in 2007.
Banks
In Korea, CDTs by banks are regulated by the Banking Act. In addition, the Foreign Exchange Transaction Act (FETA) regulates foreign exchange-related CDTs.
The Guideline on Scope of Banks' Ancillary Business issued by the Ministry of Finance and Economy provides that financial-derivative transactions are permitted as auxiliary business of banks. Typical financial-derivative transactions are on-exchange financial derivatives as well as over-the-counter (OTC) derivatives, including forwards, options, swaps and credit derivatives (excluding commodity derivatives).
According to FETA, banks intending to conduct foreign exchange-related CDTs should report this to the Bank of Korea (BOK). In addition, FETA's regulations detail the types of CDTs to be conducted by banks, including credit default swaps, total return swaps, credit default options, credit-linked notes (CLNs) and synthetic collateralized debt obligations (synthetic CDOs).
Securities companies
Credit derivative activities by securities companies are regulated by the Securities and Exchange...