Banks, Brokerages Will Compete Over Derivatives

By Park Hyong-ki

Staff Reporter

The securities and banking sectors are once again facing a conflict, this time over the issuance of derivatives products.

The Financial Services Commission (FSC), the country's top financial policymaking body, is moving to allow the banking industry to provide derivatives-linked securities (DLS) to customers for investment purposes.

This is in line with efforts to lower the operational firewall between the securities, banking and insurance sectors to spur competition.

``Banks will be able to develop a variety of products linked to foreign exchange and bonds as underlying assets, and issue derivative securities that will help them create a distinctive business model,'' said the FSC in a statement. It has not decided on whether to allow banks to issue DLS linked to underlying assets of stocks.

However, the securities industry is not welcoming the move by the financial authorities, given that derivatives issuance has been one of its operational piths in maintaining competitiveness.

Banks are currently allowed to provide derivatives products only as a hedging tool to institutional clients.

Lenders have so far expressed satisfaction regarding deregulation plans as they will be able to expand their services into a business area that securities companies have dominated over the years. Banks can rapidly advance into the DLS market as they have a competitive edge over foreign exchange (forex) and bond transactions, experts noted.

Both sectors have been at odds over a number of issues since the government mapped out the Capital Market Consolidation Act, legislation that gives tremendous power to the securities industry.

Banks have shown reluctance toward allowing brokerage firms to provide payment settlement services to customers as it could erode their customer base, and slow down their overall business, which accounts for about 60 percent of the financial market.

Under the act, securities companies will be allowed to issue credit cards linked to cash management accounts (CMA), or stock accounts as early as next year. Already, they issue check cards to customers who open CMAs, which apply higher interest rates on deposits than savings accounts at banks.

The outstanding balance of CMAs surpassed 30 trillion won for the first time last month, according to the Korea Securities Dealers Association. Meanwhile, money deposits at banks have been sluggish.

This ``money shift'' has raised concerns among banks, which have asked the government to flex its legislative muscle in favor of the industry to help them counter the growing number of brokerage firms.

The FSC is also mulling over whether to allow banks to provide equity-linked securities products in addition to equity-linked deposits, which they already offer.

phk@koreatimes.co.kr