General guidelines governing securities issuance are included in the Securities and Exchange Act of Korea. Government bonds are issued according to the government bond issuance plan prepared by the Ministry of Strategy and Finance (MOSF) and approved by Parliament.
Corporate bonds to be issued by corporations under Article 3 of the Act must be registered with the Financial Supervisory Commission (FSC) for disclosure purposes. The registration procedures are outlined in the Financial Supervisory Service (FSS) Regulation on Securities Issuance. This includes guidelines for foreign corporations that plan to issue KRW-denominated bonds. The regulation also applies to the issuance of asset-backed securities, with some modifications as stated in the Asset-Backed Securitization Act.
Securities to be issued pursuant to the Asset-Backed Securitization Act must satisfy the requirements outlined in the Regulation on Supervision of Asset Securitization Businesses, which is linked below. The recognized securitization vehicle should submit to the FSC a securitization plan that contains, among other things, information on the originator and assets to be securitized, and the proposed securitization structure. Issuance of mortgage-backed securities follows similar procedures and is discussed in the Regulation on Supervision of Mortgage-backed Securitization Companies, which is linked below. Although most securitization deals in the Republic of Korea are structured pursuant to the Asset-Backed Securitization Act, the Act does not require all securitization transactions to be subject to this law.
The Korea Financial Investment Association (KOFIA) also provides a summary of the method and procedures for offering government and corporate bonds. These are discussed on the KOFIA and Korea Securities Dealers Association (KSDA) websites, which are linked below.
Licensing, registration, and regulations for securities companies, futures businesses, investment companies, and investment advisers and their representatives are governed by the Securities and Exchange Act.
The qualifications for asset management professionals and servicers participating in securitization transactions are stipulated in the Asset-Backed Securities Act and in the Regulations on Supervision of Asset Securitization Businesses.
Accounting Standards
In compliance with the International Accounting Standards (IAS), the Korea Accounting Standards Board prescribes accounting and disclosure standards for securities through its Statement of Korea Accounting Standards (SKAS) No. 8, classifying securities as either held-to-maturity, trading, or available-for-sale.
Securities are recognized initially at cost. This includes the market value of the consideration given and any other transaction costs required to complete the acquisition. Held-to-maturity securities are accounted for as amortized costs on balance sheets after initial recognition. Trading and available-for-sale securities are accounted for based on fair value after initial recognition. For securities with active trading markets, fair value refers to quoted market prices (mark-to-market). Discounted valuations using appropriate discount rates are used when an active market is unavailable for securities. A more detailed classification for securities transactions is linked below.
Investment Funds
Article 54 of the Securities Investment Company Act of the Republic of Korea, which is linked below, stipulates that any securities investment company must publicly announce net asset values on a mark-to-market basis, as prescribed by Presidential Decree No. 5557.
Capital Adequacy Regulations
The minimum capital adequacy ratio for financial institutions is 8%, based on risk-weighted capital standards as recommended by the Basel Committee on Banking Supervision. This requires banks to mark-to-market. Fitch Ratings provides a comprehensive description of the Republic of Korea’s plan for Basel II implementation.
Income from bonds is subject to withholding tax for both resident and nonresident investors. However, domestic financial institutions are exempt from the tax under the Income Tax law, as are nonresidents receiving interest and fees related to foreign currency-denominated bonds issued by the Government of the Republic of Korea, local governments, or domestic corporations.
The tax rate on interest income for nonresidents was reduced from 25% to 14%, effective January 2007, to bring it in line with the tax rate for residents. Combined taxes result in an effective tax rate of 15.4%.
A summary of tax rates on resident and nonresident interest income and capital gains is given in the table below. The Ministry of Strategy and Finance (MOSF) and the National Tax Service of Korea (NTS) sets the tax system for both residents and nonresidents. More detailed information can be found by following the links provided below.