Citi, Hanwha withdraw applications for Korean OTC licences

The regulator, the Financial Supervisory Service (FSS), is due to make its official decision on all five licence applications on August 24, an insider told Asia Risk. He added that only two financial institutions have been successful with their applications, which suggests the two are among Dongbu Securities, Seoul Securities and SK Securities.

Citi declined to comment, but a source close to the bank said it was forced to withdraw its application because the FSS “changed the requirements”, and that the bank plans to re-apply at some undisclosed point. Hanwha Securities did not respond to emails for comment, and Dongbu Securities could not be reached for comment.

A Seoul Securities spokeswoman confirmed the company had been audited by the FSS in July and was awaiting the results. One Seoul-based executive at a large international bank said Seoul Securities is thought to be in good shape to receive a licence.

But he added that SK Securities is unlikely to be successful this time, despite having hired a chief risk officer and several trading and settlement staff since the start of the year. SK confirmed it had re-applied and had been audited, but declined to comment further. The company had failed to gain licence approval on its previous application at the start of the year and had subsequently withdrawn.

Dongbu Securities was not immediately available for comment.

The international bank executive added that Morgan Stanley also applied this time – having failed to obtain an OTC licence in the previous round at the start of 2007 – but had also withdrawn its application. Another source backs this up. A Morgan Stanley spokesperson says: “We do not publicly comment on the status of our dealings, including any applications lodged, with our regulators.”

An OTC licence allows a company to issue equity-linked derivatives, securities and warrants denominated in Korean won, as opposed to simply broker or trade them. Macquarie Securities Korea in March became the first foreign dealer to obtain a full licence earlier this year.

The Asia Risk source said the FSS has told firms that the next round of applications can be submitted in September. It is understood that Deutsche Bank and UBS are making preparations to apply, although spokesmen for both banks declined to comment.

Obtaining an OTC licence is a very rigorous process, especially for foreign firms (see Asia Risk May 2007, 'Supervisory clampdown'). Requirements include already having a licence covering broking, dealing and underwriting; holding 100 billion won ($107 million) in capital in Korea; and having risk management staff and systems based locally – international banks cannot rely on their head or regional office experience and capabilities to fulfil local regulatory requirements.

Several firms that have undergone the application process have expressed frustration at the constant back-and-forth nature of the negotiations. But some other firms accept that this is perhaps to be expected.

“The Korean derivatives market has only been open for five or six years, so it’s a continual learning process for both the regulator and international firms, as both sides seek to bring onshore and establish certain global practices and infrastructures that are new to the Korean market,” says Nick Johnson, branch manager at Société Générale Securities in Seoul.

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