Development of Capital
Market and Tasks Ahead

Following the financial crisis of 1997, the financial market went through a rapid structural change. The market system went through a great change with improvements based on global standards. The liberalization of the capital market has opened its door for a substantial foreign capital increase, with diversified systems of improvement including transparency in corporate governance, mergers and acquisitions, accounting, among others, followed by the introduction of advanced financial techniques.
The stock market is in the process of climbing to its highest level in its history marking over 1,400 in KOSPI index. This shows that the capital market has greatly been upgraded by a step, we believe, since the market movement had been confined to the range of 500 to 1000 KOSPI index in the past. The capital market has made of a lot of progress in the process and foreign investors have recognized the improvement.
The financial market in Korea had been centered on banks. Corporations depended on loans from banks for funds, rather than securities and bonds and naturally, the development of the capital market and the securities industry has been sluggish. In order to spur the restructuring of the securities industry and enhance its competitiveness, the government has allowed the securities firms to operate trust accounts, make products out of derivative securities, in addition to handling derivative financial products created outside the stock market and credit derivative financial products.
The government did not stop there. It is working to set up the capital market integration law to allow the emergence of competitive investment banks in global terms as part of its plan to turn the market into a regional financial hub in Northeast Asia. The government expects the law will expedite the restructuring of companies that manage securities, futures, and asset management for them to become larger and more professional with the development of diversified financial products and their sales, which will make the securities industry more competitive, leading the securities market and capital market to develop further. Indirect investment and institutional investment should be invigorated for the stable growth of the securities market and the settlement of a sound investment culture. The government has been trying to expand the demand for long-term equity investors by increasing the number of institutional investors. Financial institutions and pension funds were allowed to invest in private equity funds. Pension funds were also allowed to be invested in securities and retirement pension funds were also introduced in the country. The government will continue to try to improve institutional investors including private equity funds, indirect asset management firms, pension funds, and retirement pension funds the settlement of indirect investments in the country. The government tried to integrate stock exchanges since 2003 and the effort has paid off with the formation of Korea Exchange Inc., which integrated the stock exchanges in the country as of January last year.
The stock exchange, futures exchange, the Kosdaq committee, and Kosdaq exchange were integrated, but market headquarters manages the operation of each market autonomously. Clearance, settlement, and IT, among others, also were integrated to boost the effectiveness of the market. The integration saved manpower and budget with reductions in listed companies'expenses. The government will continue to make efforts to improve the operation of the integrated exchange for synergy in a number of key areas and market's effectiveness. It will try to work toward the integration of IT, attract foreign companies to list on the exchange, the internationalization of the futures exchange through cooperation with foreign stock exchanges and reform the commission system of the stock futures exchange on a continuous basis.
The government has done a lot to invigorate foreign investment in domestic firms and boost an understanding of the Korean investment climate to foreign investors by improving corporate governance and transparent management through diversified systems. The government has also strengthened the rights of the Audit Committee members and improved the decision-making system of corporations, along with measures to make internal control of corporations strong including the inhibition of the practice of lending money to members of board of directors and major shareholders of companies. It has also tried to make their accounting transparent by encouraging listed firms to change their accounting firms on a regular basis and prohibiting accounting firms to engage in non-audit work areas. In order to boost fairness and balance of the M&A market, it made easier to acquire firms openly and made M&A activities more transparent by improving the 5 percent rule.
We believe that that improvement pushed by the government has had a lot of help in upgrading Korea's sovereign credit ratings by international credit agencies. The government will continue to make efforts so that corporate governance structure introduced from advanced countries would continue to be maintained, as it will strengthen its evaluation of the financial markets. The government will take care of matters that need system improvement based on global standards and domestic situations.
Systems will also be improved to spur the growth of the bond market and gradually open the accounting service market to advance the market as part of the diversified government effort to invigorate the sound growth of the capital market, which has been growing rapidly due to liberalization and relaxed regulations. Ultimately, the government will continue to ease regulations for the sake of the initiatives of the capital market, but it will strengthen the measures for protection of investors and soundness of the market. nw

By Choi Sang-mok
Chief of Securities System Div.,
The Financial Policy Breau,
The Ministry of Finance and Economy