South Korea: Legislation on electronic securities

Soonghee Lee

In Korea, most securities, except for electronic short-term bonds, are issued in paper form and managed through a central deposit. As of January 2014, however, 31 OECD (Organisation for Economic Co-operation and Development) countries and China have adopted an electronic securities system, whereby securities are not issued in paper form and registration in an electronic registry is performed instead. Under this electronic securities system, the rights of securities holders are recognised, and the transfer, establishment of security over and exercise of rights are performed. The adoption of the electronic securities system allows cost savings compared with the issuance of securities in paper form, and it also removes risk factors resulting from the custody and management of securities in paper form. Further, through the foreclosure, in principle, of tax evasion, money laundering and other illicit transactions, the adoption of the electronic securities system is expected to result in the adoption of real-name securities transaction and holding systems; it is also expected to contribute considerably to investor protection and the formation of a fair trading order through prompt provision of information on the issuance and circulation of securities. As such, the National Assembly of Korea is discussing legislation for the adoption of an electronic securities system in order to improve capital market efficiency by facilitating the issuance and circulation of, and exercise of rights with respect to, electronic securities.

The main contents of the draft legislation on the issuance and circulation of electronic securities being discussed by the National Assembly are as follows: (i) regarding the system for operation and management of the electronic securities system, the bodies operating the system would be an electronic registry and account management institution, and the electronic securities issuer or rights holder may issue electronic securities or acquire rights by opening an account with such operating bodies; (ii) regarding the process for issuance, circulation and cancellation of securities under the electronic securities system, a person who wants to issue electronic securities notifies the details of issuance of electronic securities to the electronic registry institution and registers an account. The transfer of rights to the electronic securities, the establishment of pledge, and the establishment and extinguishment of trust assets, would be performed by the rights holder filing an application with the institution where the relevant electronic securities are registered and registering an account; (iii) regarding the method of exercise of rights on electronic securities, the rights holder may exercise rights regarding electronic securities through an electronic registry institution, and through an ownership certificate issued by an electronic registry institution upon application by the owner, the exercise of ownership rights may be exercised against the issuer of the electronic securities or third parties; (iv) regarding the protection of rights under the electronic securities system, the entry of false information in the information systems of the electronic registry institution and account management institution and similar conduct would be prohibited, as would the use of work-related information by employees of the electronic registry and account management institutions.

The above draft legislation being discussed, if adopted, is expected to promote the growth of Korea's capital markets.

Soonghee Lee

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