The financial investment industry is in turmoil after the Fair Trade Commission imposed a total fine of 1.376 trillion won on 10 securities firms that serve as specialized dealers (PDs) in government bonds. As this represents the highest-level cartel fine ever imposed on the financial investment sector by regulatory authorities, it is pointed out that the impact on capital and earnings will be significant, and a blow to trust as players in the bond market is inevitable. With securities firms reportedly considering administrative lawsuits, difficulties are also expected during the process of accounting for the fines and determining participants in the government bond market.
On the 11th, the Fair Trade Commission announced that 15 government bond specialized dealers (PDs) had engaged in a cartel by agreeing on pre-bid interest rates and volumes or exchanging bid rate information while participating in competitive bidding for government bonds over approximately three years and six months. Accordingly, it issued corrective orders and imposed fines totaling 1.626575 trillion won on the 15th firms, and decided to refer seven of them for prosecution.
The securities firms subject to sanctions such as fines this time are 10 firms: KB, NH Investment, Mirae Asset, Shinhan Investment, Daishin, Samsung, Kiwoom, Meritz, Korea Investment & Securities, and Kyobo Securities. Among these, Mirae Asset, NH Investment, KB, Kiwoom, and Korea Investment & Securities were also included among the targets for prosecution. KB Securities faced the largest fine of 332.178 billion won, followed by NH Investment & Securities at 242.785 billion won and Mirae Asset Securities at 214.83 billion won. Shinhan Investment Corp (147.36 billion won), Daishin Securities (120.051 billion won), and Samsung Securities (118.86 billion won) were also hit with fines exceeding 100 billion won.
The financial investment industry is inevitably facing a blow to its credibility as a player in the government bond market. The Korea Fair Trade Commission pointed out, “Competitive bidding, where government bond PDs independently determine bid rates, is essential even in an uncertain situation where it is unknown at what level the winning bid rate will be determined, but they engaged in a cartel to eliminate such uncertainty and avoid competition.” According to the Korea Fair Trade Commission’s judgment, when high winning bid prices were expected due to strong demand, government bond PDs had incentives to collude on interest rates to prevent their own profit margins from shrinking.
The financial investment industry argues that the exchange of information by those actually handling the work did not lead to unreasonable pricing of interest rates. An official in the financial investment industry stated, “While working on government bond PD duties, there were instances of exchanging information via messengers, but this does not mean that interest rates were set unreasonably when issuing bonds,” adding, “There has been no negative impact on the state or the market due to the interest rate setting by PDs, yet this sanction is excessive.”
Forecasts indicate that the fines each firm must bear will inevitably worsen their earnings and soundness indicators. KB Securities, which had the largest bidding amount in the government bond PD market, will have to pay a fine of approximately 332.2 billion won, equivalent to 54% of its net profit last year. Shinhan Investment Corp must pay 41% of its net profit from last year, and Mirae Asset Securities must pay 36%. As securities firms’ earnings in the second half have plummeted compared to the first half, if reflected in fourth-quarter results, net income for the period is expected to decline further.
Fines from the Korea Fair Trade Commission must be reflected in accounting within 60 days, so it is projected that each firm will recognize them as provisions for liabilities in its accounts as early as the fourth quarter or the first quarter of next year, depending on their judgment. A securities firm official explained, “We are reviewing whether and when to recognize provisions for liabilities according to accounting standards,” and added, “We are also checking the impact on financial soundness indicators such as the Net Capital Ratio (NCR).”
The financial investment industry is keeping open the possibility of administrative lawsuits against the Korea Fair Trade Commission. Given that they have been hit with a “record-breaking” fine, many predict that most securities firms will individually file administrative lawsuits.
Concerns are also emerging that securities firms may be reluctant to enter the government bond PD market. This is because the Korea Fair Trade Commission has left a major precedent of sanctions, thereby increasing sanction risks. An official in the financial investment industry said, “It is difficult to definitively state the impact on government bond operations, but who would want to jump in?” adding, “The specific characteristics of the government bond market and the PD system should be fully considered.”
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