New Market Research Report: South Korea Commercial Banking Report Q2 2012

(live-PR.com) - BMI View: The recent revision of capital market regulations in South Korea have set the stage for the liberalisation of the domestic hedge fund industry. While the deregulation of the funds industry is likely to bring about many economic benefits and foster the growth of investment banking services, we believe that the industry still faces multiple challenges.

 

The lack of capital, a sizeable talent pool and technical expertise, as well as relatively stringent regulations in comparison to its regional neighbours, are likely to stymie the short-term growth of the industry. South Korea appears to be taking another step towards financial liberalisation. Revisions to the Financial Investment Services and Capital Markets Act (FISCMA) came into effect in October and are expected to foster the growth of 'Korea-style' hedge funds. While hedge funds were technically permitted since 2009, they served an overriding purpose of aiding in the corporate restructuring process. Consequently, stringent enforcement ordinance made the operation of such specialised investment vehicles infeasible, thereby stemming their growth. This is unsurprising given that regulators were likely to have erred on the side of caution following the implosion in financial markets during the global financial crisis. While the comprehensive revision in the FISCMA provides for investor protection - such as fund management qualifications and reporting obligations, the crux of FSC's deregulatory efforts centres around funds' operational aspects: ???? Leverage of up to four times the invested capital is now permitted, up from three times previously. ???? Maximum exposure for derivatives trading has been bumped up four times to 400% of the fund's capital, from 100% previously. ???? Requirement for investment of at least 50% of fund's total assets in firms undergoing corporate restructuring has been abolished. Additionally, investors' barriers to entry have been lowered, with individuals requiring KRW500mn, as opposed to the previous floor of KRW1bn to qualify for investment. While the bar has been lowered for both funds and investors alike, we believe that the present economic climate and lessons from the recent global financial crisis are likely to entail in a gradual deregulation of the capital market laws and, consequently, growth of South Korea's hedge fund industry will only start to take off in the medium term. South Korea Commercial Banking Report Q1 2012 © Business Monitor International Ltd Page 33 In this article, we highlight a number of opportunities and challenges we see South Korea's hedge funds industry facing, as well as why we believe the industry is unlikely to proliferate in the short-term. Funds Provide Economic Benefits, Impetus For Investment Banking Growth From an economic perspective, the revision of capital markets regulations bring about a number of plausible benefits to South Korea's financial markets. The introduction of hedge funds is likely to, in their role as arbitrageurs, provide an added dimension of efficiency to the country's financial markets. Moreover, they are also likely to enhance the competitiveness of the domestic financial market. We can expect the asset management sector to leverage on the sophistication that such specialised funds will bring as the industry develops past its nascent stages. Added investment and diversification opportunities for investors will be provided, although such opportunities will be confined to the more affluent. More pertinent, however, is that the seeds have been sown for the establishment of homegrown investment banks. Central to the operation of hedge funds lie prime brokerages, a primary investment banking service that facilitates the lending of securities, financing, as well as a myriad of custodial services. Scalability is crucial in this regard as prime brokers operate around their capacity to provide securities lending with a firm eye on cost competitiveness. Consequently, we should see demand for prime brokerage services start to pick up as the domestic hedge fund industry begins to mature, providing a fresh impetus to the growth of South Korea investment banks. Challenges Still Aplenty Despite Liberalisation The fledgling funds industry is not without its challenges and we highlight a number of concerns for the industry's growth prospects in the short- to medium-term. Given the precarious position of the global economy, funds are likely to face an uphill task in their capital raising efforts. Individual and institutional investors alike look to be relatively risk-averse in light of the downbeat economic outlook. Moreover, funds will also face stiff competition for capital in the coming years as banks regionally and globally begin to beef up their capital base in preparation for Basel III implementation. The industry's growth prospects are likely to be hindered in the immediate term owing also to a lack of fund management expertise. Arriving relatively late into the game, the domestic funds industry lacks the talent pool and, together with it, the technical sophistication that typifies such investment vehicles. Indeed, all but one of the 12 hedge funds that were established in December have adopted the rudimentary 'long-short equity' as their primary investment stratagem. While a significant portion of funds employ this investment style, advancement into other techniques are a prerequisite to foster growth of the broader asset management industry. Moreover, South Korea's stock market is characterised by a highdegree of volatility and is subservient to the ebb of foreign capital in times of economic uncertainty and risk aversion. The lack of diversity in funds' investment approaches and the prospect

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