Friday, February 19, 2010

South Korea OTC Law Approved

Original posted on International Financial Law Review by Tim Young:

South Korea’s New Product Approval (NPA) bill that will force banks to seek approval before selling new types of over-the-counter (OTC) derivatives has passed through the legislation and judiciary committee.

The bill received initial approval on February 16. It is expected to be passed on February 26 in the assembly plenary session.

If passed, the law will have a dramatic effect on institutions selling derivatives in the country. Any new credit derivatives will have to be reviewed by the newly established Korea Financial Investment Association (Kofia), regardless of the counterparty. And any new derivatives sold to general investors will also have to be approved, regardless of the underlying.

The NPA will affect all licensed investment brokers or dealers. These include a number of foreign banks, which have been fiercely contesting the licences and the right to trade derivatives in the country for years.

Despite political pressure to pass the bill, opposition remains. “It will seriously restrict the derivatives market,” said an in-house counsel at a Korean bank.

The counsel believes the pre-approval committee – made up of professors, accountants and private practice lawyers – won’t be knowledgeable or confident enough to approve many of the products.

“These so-called experts will be conservative in their approvals. Many are still aware of the litigation surrounding last year’s currency options and won’t want to be seen approving a product that could lead to further litigation,” he added.

The proposals are unique. “We have conducted a wide range of research into OTC regulation and have found nothing like this anywhere in the world,” said Hyun Joo Oh, derivatives partner at Lee & Ko in Seoul.

In December 2009, when the law was first proposed, The International Swaps and Derivatives Association (Isda) also publically criticised the plans.

Banks will have time to adjust though: the bill contains a grace period of three months, which is expected to remain in the final law if it is passed.

Some fear the law slowing down new products. “In OTC, timing is very important. If it takes two or three months for the banks to obtain approval it will be incredibly hard to launch products,” said Hyun Joo.

In informal conversations with the regulator, Hyun Joo was told that that the approvals will take between one and two weeks. “They have promised to expedite the process, but we’ll have to see.”

She does think that products will still be approved though. “Rather than a straight ‘no’, it’s more likely Kofia will ask to add some risk disclosure to the counterparty,” she added.

See also:

To hear a presentation by Isda outlining the problems with the bill, click here

Isda’s criticism of the proposals from December last year

An in-depth analysis of the law and its effects by Yoon Yang Kim Shin & Yu

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