Trading

The secondary market in Korea is divided between the Korea Exchange (KRX) and the over-the-counter (OTC) market. KRX is an organized market, offering competitive trading of listed bonds. Operated by the Korea Financial Investment Association (KOFIA), the OTC market trades all types of bonds regardless of whether they are listed on the KRX or not.

The OTC market is further classified into a Dealer market and an Inter-Dealer Broker (IDB) market. The Dealer market is where bond dealers conduct transactions by responding to customer orders with their own bids and asks.

The IDB Market is where brokerage firms play the role of inter-dealer broker in responding to bids and asks while facilitating trade of mainly corporate bonds, financial bonds, and other special bonds. By protecting anonymity, block trading without exposing positions is possible on this market and, as a result of popular use of the auction system, bids and asks of dealers are displayed on the screen and matched automatically without intervention of brokers (screen-based system).

Most corporate bonds are listed on the KRX but traded on the OTC market, as the main bond traders are institutional investors. Securities firms act as IDB on the OTC market to match transactions. Equity-related bonds are traded on the KRX market for retail investors.

The table under the Trading System (linked below) enumerates basic differences between the two bond trading markets in terms of trading method, trading unit, among others.

Settlement

Settlement depends on where the bonds are traded. The Korea Securities Depository (KSD), however, acts as operator of the settlement system for bonds traded on the OTC market and the KRX, providing book-entry transfer and centralized depository services. Foreign investors will need a local custodian to facilitate settlement. Securities held by foreign investors are deposited by custodians at the KSD.

For settlement of KRX bond transactions, the KSD, which acts as a central depository, settles the securities transactions by a simple book-entry transfer of securities certificates to a receiving party through their KRX accounts, without any physical movement of certificates. The securities companies are required to deposit with the KSD their own shares as well as those of their customers. Institutional investors are also encouraged to open accounts with the KSD. Fund settlement is done through electronic fund transfer by commercial banks.

For OTC bond transactions, both full delivery-versus-payment (DVP) settlement in central bank money and free-of-payment delivery are available. (About 40% of total OTC transactions are settled by DVP and about 60% on a free-of-payment delivery basis). Under the DVP scheme, settlement of securities and funds are made in real time and simultaneously on a gross, trade-by-trade basis. The DVP system is based on a direct link between the securities settlement system of the KSD and BOK-Wire of the Bank of Korea (BOK). In the free-of-payment delivery scheme, securities are settled through the KSD book-entry, with cash settled through the BOK or commercial banks separately from the securities transfer. The settlement of funds goes to the BOK.

Settlement on the OTC market is T+1 to T+30, while on the KRX it is T+0.

The designated standing proxy may be tasked to collect or remit interest. Eligible institutions include securities firms, the Korea Securities Depository, foreign exchange banks, international custodians or securities firms. Foreign investors may appoint multiple proxies.

Proceeds of sales can be freely repatriated. Foreign investors can route their securities-related foreign exchange through any foreign exchange bank, but it is highly recommended that the custodian bank and foreign exchange bank are the same. This facilitates smooth trade settlement, especially given the tight settlement timeframe.

Purchases of Korean won by foreign investors must be related to securities investments and should be no more than the value of the securities being purchased. Korean won may be bought or sold up to two days forward, so long as the transactions are related to securities trades. Sales proceeds converted into foreign currency can be either remitted overseas or held in onshore foreign currency accounts.