Over-the-Counter Bond Specialist Dealers on the Decline... Securities and Banks Throw in the Towel

Samsung Securities to Exit... One Year After Daishin Securities
Only 6 Specialized Dealers Left... Banks Are Only Foreign
FSS Continues to Consider Regulatory Improvements

As the over-the-counter (OTC) bond specialist dealer system, which marked its 24th anniversary this year, becomes ineffective, securities firms and banks are voluntarily surrendering their dealer qualifications.

According to the Financial Supervisory Service (FSS) and the financial investment industry on the 4th, Samsung Securities requested the cancellation of its OTC bond specialist dealer qualification designation from the FSS last August. This comes one year after Daishin Securities voluntarily returned its dealer qualification in August last year. If the company maintains its cancellation stance for two consecutive quarters, the cancellation procedure will be completed.

Now, only six specialist dealers remain: four securities firms (Shinyoung, NH Investment & Securities, Shinhan Investment, SK Securities) and two banks (Deutsche Bank and Hong Kong and Shanghai Banking Corporation (HSBC)). This is about one-third of the 17 firms in 2010.

Introduced in 2000, the OTC bond specialist dealer system was intended to activate trading and enhance market transparency by simultaneously submitting bid and ask quotes. At that time, the OTC market was not active, resulting in a lack of accurate market information and low trading liquidity. However, as the OTC bond market continued to grow, the role of specialist dealers diminished. Since submitting quotes no longer affects transactions at all, the industry has expressed doubts about the system's sustainability.

In fact, the market-making performance of bond specialist dealers has been steadily declining. According to the Korea Financial Investment Association, as of the second quarter of this year, the market-making performance totaled 5.06 trillion won based on combined bid and ask volumes, falling to the 5 trillion won level. This is less than half compared to 11.77 trillion won in the second quarter of last year. At one point in the past, quarterly performance exceeded 100 trillion won, but since the third quarter of last year, it has shrunk to below 10 trillion won.

From the companies' perspective, the workload from submitting quotes is not significant, but there is no proper incentive to maintain the qualification. The financial supervisory authorities reduced the number of mandatory market-making items to seven or more in 2007 to revitalize the specialist dealer system, but around 2020, it was expanded again to nine or more. A financial investment industry official said, "Around 2020, we were instructed to submit two-way quotes daily for nine or more items, including five corporate bond items, two financial bond items, and two government bond items, which increased the burden somewhat."

Another financial investment industry official said, "In the case of government bond specialist dealers (PD) managed by the Ministry of Strategy and Finance, they can receive incentives when allocated government bond volumes, but for OTC bonds, the industry has no proper incentives to demand. I understand that some companies have voiced requests for system improvements, but realistically, it seems difficult."

The financial authorities also agree on the need for system improvement. A representative from the FSS Securities Trading Supervision Team explained, "It is true that the number of dealers is continuously decreasing. The system was introduced to activate OTC bond trading, but many question its usefulness. If the system is to be maintained, we are internally considering how to strengthen its merits."

This content was produced with the assistance of AI translation services.