From KRW 273 Billion Profit to KRW 59.1 Billion Loss... Treasury Bond Fines Rock Yeouido

FTC Imposes KRW 1.62 Trillion in Collusion Fines on Financial Firms
Fines Against 10 Securities Firms Alone Total KRW 1.37 Trillion
Securities Firms Worried About Weaker Earnings: "Administrative Lawsuits Are Inevitable"

The Fair Trade Commission (FTC) has imposed the largest-ever fines on the financial investment industry over collusion in Korean Treasury bond auctions, raising the likelihood that securities firms' earnings will plunge in the second half of the year. Securities firms, whose results were already deteriorating after a sharp correction in the Korean stock market in the third quarter, were taken aback by the massive fines. They said the fines were excessive and announced plans to file administrative lawsuits. The Ministry of Economy and Finance, concerned that the Korean Treasury bond market could contract, will draw up guidelines distinguishing legitimate information exchanges from illegal collusion.

FTC Imposes KRW 1.62 Trillion in Fines on Financial Firms for Korean Treasury Bond Collusion

According to the financial investment industry on November 12, KB Securities issued a corrected disclosure the previous day, saying its third-quarter net profit had turned into a loss of KRW 59.1 billion, from the KRW 273 billion profit it had initially reported. Kiwoom Securities also issued a corrected disclosure on November 11, revising its third-quarter net profit down to KRW 177.8 billion from KRW 238.6 billion.

The sharp decline in the two securities firms' third-quarter profits came after the FTC's fines for collusion in Korean Treasury bond auctions were belatedly reflected in their results. On November 11, the FTC imposed fines totaling KRW 1.6265 trillion, the largest ever in a single case, on 15 primary dealer (PD) firms, saying they had colluded while participating in competitive Korean Treasury bond auctions from January 2020 to June 2023, including by agreeing in advance on bid rates and volumes. Securities firms accounted for 10 of the 15 PD firms, with fines totaling KRW 1.376 trillion. KB Securities received the largest fine, at KRW 332.178 billion, followed by NH Investment & Securities at KRW 242.785 billion and Mirae Asset Securities at KRW 214.83 billion.

Securities firms said they were taken aback by the massive fines. An official at one securities firm said, "Korean Treasury bond auctions are not a particularly profitable business to begin with, and some firms have continued operating in this area to fulfill their market-making obligations. Calculating the fines based on the amount paid to buy government bonds makes the burden excessive compared with the actual profits earned." An official at another securities firm said, "The company has not yet received the FTC's written resolution, so it seems that we will discuss our response in earnest after receiving it." The official added, "However, a lawsuit appears inevitable to avoid a breach of fiduciary duty and other legal risks."

An industry-wide response is also expected. The Korea Financial Investment Association issued a statement on November 11, saying, "Despite difficult conditions, PD firms have contributed to the smooth financing of the national budget with a sense of mission and a commitment to contributing to the national economy." It expressed regret that "excessive sanctions from the FTC could undermine their roles and functions as primary dealers and, in turn, seriously disrupt the issuance of Korean Treasury bonds." The association added, "We will actively support the industry in demonstrating the problems with these sanctions and the unreasonableness of the fine calculations through lawful procedures, including administrative lawsuits."

Separately from any lawsuits, securities firms are expected to pay the fines in the third or fourth quarter. They are reportedly planning to pay first and seek to recover some of the money through litigation. NH Investment & Securities analyst Yoon Yudong said, "Because late payment of the fines would incur additional charges, securities firms are likely to pay them first to avoid further costs and then respond through lawsuits." As a result, a contraction in securities firms' earnings in the second half of the year is inevitable. With securities firms' second-half profits already expected to plunge from the first half due to the recent stock market correction, the fines are likely to deepen the decline.

Government to Draw Up Guidelines Amid Concerns Over Contraction in Korean Treasury Bond Market

As concerns grow that the record fines could deter PD firms from participating in the market, the government has decided to draw up related guidelines. According to the Ministry of Economy and Finance, the government plans to establish detailed guidelines during 2027 setting out standards for information sharing in Korean Treasury bond auctions.

Because the Korean Treasury bond issuance market involves frequent transactions by a small number of government-designated primary dealers, implicit communication to reduce uncertainty in bidding has been common. However, the sanctions have prompted concerns that even legitimate information exchanges could be curtailed, increasing the need to clearly define, through institutional measures, what forms of communication are permitted and what information sharing is prohibited. A government official said, "The results of recent meetings with industry participants showed that many financial firms have already established their own internal control systems." The official added, "We will provide more detail, and the guidelines could take effect around 2027."

The Ministry of Economy and Finance is also unlikely to impose separate sanctions on PD firms immediately. Regulations allow authorities to temporarily suspend or revoke a firm's PD designation at their discretion, but the ministry is expected to wait for the final legal outcomes, including lawsuits challenging the decision by financial firms, before considering whether to take action. Korean Treasury bond issuance is expected to reach around KRW 100 trillion next year, and the government also faces the risk that issuance and absorption could be disrupted if a large number of sanctioned financial firms are removed from the market.

Some financial firms, burdened by the large fines and the cost of internal controls, may voluntarily relinquish their PD status. An industry official said, "The government now faces the challenge of responding firmly to collusion while also ensuring the stability of the Korean Treasury bond market." The official added, "The government is likely to focus on institutional reforms, including establishing guidelines, to minimize the market impact."

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