Introduction To Securities Trading in KRX

KOREA
EXCHANGE
Introduction to Securities Trading in
Korea Exchange
}}/ - ,((7 - 7
Korea Exchange
Contents
I. Summary
1. Regulations Related to Securities Trading and Order Entrustment
2. Trading Procedures
3. The Structure of Electronic Trading System
II. Entrustment System
1. Opening of Account
2. Method of Receiving Trade Entrustment
3. Refusal to Accept Entrustment of Orders
4. Good Faith Deposit
5. Brokerage Commission
III. Trading System
1. Market Operation
2. Trade Execution
3. Market Management
4. Exceptions to Trading Methods
5. Satisfying the Special Trading Demand
6. Liquidity Provider System
IV. Clearing and Settlement System
1. Definition of Clearing and Settlement
2. Clearing System of KRX
3. Settlement System of KRX
4. Management of Settlement Risks
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Korea Exchange
I. Summary
6 Introduction to Securities Trading in Korea Exchange
I. Summary
L Many investors, both the individual and institutional, participate in the
Markets operated by the Korea Exchange (KRX), where a variety of
investment products changes hand. Therefore, the KRX regulates and
standardizes the securities trading to ensure the orderly and fair
transaction.
Accordingly, the Securities and Exchange Act (Article 94) stipulated
that the business regulations of the KRX must spell out the matters
relating to securities trading in its markets.
- The Stock Market Business Regulation and the Kosdaq Market Business
Regulation of the KRX stipulate the regulations concerning the
entrustment and routing of orders, order matching and trade
execution, market operation and clearing and settlement of trade.
The establishment and amendment of the regulations of the KRX
require the approval of the Financial Supervisory Commission (FSC),
which consults the Minister of the Finance and Economy (Article 115
of the Securities and Exchange Act).
The regulations on entrustment specify the methods and procedures
that the securities companies (the members of the KRX) follow when
receiving orders from their customers, including the opening of
account, order receiving, good faith deposits, and commission fees.
The regulations on trading specify the detailed trading methods and
procedures adopted in the KRX Markets, including the trading hours,
trading day and trade execution methods.
The regulations on market operation specify the matters necessary for
operating markets, thus ensuring the establishment of fair market
price and reliable transaction. The stipulations on publication of market
price and market measures such as the ex-dividend and designation as
abnormally rising issue are the example of such atters.
1. Regulations Related to Securities Trading and Order Entrustment
A. Introduction
B. Regulations on order entrustment and trading
C. Regulations on market operation
KOREA
EXCHANGE
7 Summary
The regulations on clearing and settlement spell out the methods of
clearing and settlement between the securities companies and their
customers and the member securities companies and the KRX, as well
as the method of handling the settlement default.
D. Regulations on clearing and settlement of trade
KRX
LOpening of accounts
In order to trade in the KRX Markets, the investors have to first open a
trading account with a securities company.
LOrder submission
Investors submit their orders to the securities company with whom
they have opened the trading accounts, and then the securities company
places the quotations for the customer orders in the KRX Markets.
Upon receiving quotations, the KRX trading system matches the
quotations according to the established trading principles, and then
notifies the results of trade execution to the concerned securities
companies. The securities companies, in turn, notify their customers of
the trading results.
LSettlement between the securities companies and the customers
According to the results of trade execution, the customers must make
the payment of the purchase amount and deliver the securities sold to
the securities companies by the settlement deadline.
2. Trading Procedures
A. Opening of accounts and order submission
B. Trade execution and notification of the result thereof
C. Settlement
KOREA
EXCHANGE
9 Summary
L The system of securities companies handles the functions relating to
receiving of orders from customers, including the account management,
order routing, management of securities depository and stock savings.
LBASE21 system and Systems of securities companies
The BASE21 System i s the system that the KOSCOM (Korea
Securities Computer Corporation) has developed and been operating
on behalf of a group of securities companies that do not operate their
own system.
Independent systems of securities companies are the system that
individual securities company operates independently.
* The individual securities companies began to operate their own systems from
November 1996, and as of February 2007, total of 25 securities companies
operates their own system.
The trading systems operated by the Stock Market and Kosdaq
Market consist of the front-end system and the trade execution system, and
they handle the tasks relating to the receipt and compilation of quotations
placed by the securities companies, trade execution, notification of trade
results, generation of settlement data, etc.
The information system generates and disseminates various price and
market data, including quotation data, information on price fluctuation
and market conditions that are useful for making the investment
decisions.
3. The Structure of Electronic Trading System
A. Systems of securities companies
B. The KRX trading systems
C. Information system
L Settlement between the securities companies (the members of the KRX)
and the KRX
When the securities companies deliver the purchase amounts and the
securities sold to the KRX, the KRX makes the payment or delivers the
sold securities to the counter party securities companies.
KRX
KOREA
EXCHANGE
D. Other computerized systems
Futures and Options system : The system performing the functions
relating to the trading of futures or options contracts (the KRX).
Foreign investor management system : The system administering the
ceiling placed on the foreign shareholdings (the Financial Supervisory
Service).
Market surveillance system : The system that monitors the movement
of price and trading volumes, as well as the market rumors, thus
preventing unfair trading activities (the KRX).
KRX
Korea Exchange
(1) Opening of account
When intending to submit the orders entrusted by a customer, the
concerned securities company (the KRX members) must open a
trading account for the customer before placing the quotations on behalf of
the customer (Article 77 of the Stock Market Business Regulation; Article 33
of the Kosdaq Market Business Regulation).
This is to ensure that both the securities company and their customers
consent to the details of the service agreement and the customer's
orders are handled in accordance with the conditions spelled out in the
agreement.
(2) Purpose of account opening
The purpose is to state the entrustment conditions in writing, thus
preventing the disputes that may arise later. It is intended to protect
the investors by allowing them to examine the service conditions before
entrusting their orders.
(1) Agreement for opening a trading account
LWhen an investor opens a trading account with a securities company, the
investor is entering into the Agreement for opening a trading account
with the securities company, which covers the following matters :
The member securities company and the customer open a trading
account for the purpose of trading securities in the Markets operated
by the KRX; and
The customer consents to the details of the agreement.
LMeanwhile, the securities company is required to keep the written record
of customer information such as the name, address and resident
identification number, which must be confirmed at the time of opening
the account.
1. Opening of Account
A. Introduction
B. How to open an account
KOREA
EXCHANGE
13 Entrustment System
(2) Service agreement
LThe service agreement is a standard agreement that is used when a securities
company and the customer agree to open a trading account.
As the securities company enters into the agreement for opening a
trading account with many investors, it is difficult to accept different
service agreement with each investor. Therefore, a standard service
agreement is drawn up and used at the time of opening a trading
account.
LThe service agreement must include the following matters, which are
specified by the KRX, and the securities company may include other
matters that it deems necessary :
Matters relating to compliance with the relevant laws and business
regulations of the KRX;
Matters relating to the priority of quotations placed for the orders
received from customers;
Matters relating to the securities company's right to refuse to accept
the customers'orders, and the collection of good faith deposit and
brokerage commission;
Matters relating to the restriction of discretionary trading and the
prohibition of arbitrary trading; and
Matters relating to handling of settlement default.
LAdditionally, at the time of opening a trading account, the securities
companies are required to explain the main points of the service
agreement to their customers. In case where the details of service
agreement are modified, the concerned member securities company is
required to notify such details to the KRX within 5 trading days they are
put into practice.
KRX
When receiving a written order, the member company must used an
order slip, which is filled out by the customer and signed or imprinted
his/her seal thereon.
When receiving orders over telephone, facsimile, etc., the staff of
member securities company who receives the order must confirm that
the submitter is the customer himself/herself and prepare an order slip
and sign or imprint his/her seal thereon, and keeps the record of order
details using such method as tape-recording, etc. for a fixed period.
When the computer order slips are stored separately using an
electronic device after signing electronically (including the electronic
signature and other equivalent signature), the printed copies may not
be kept.
LIntroduction of Home Trading System.
The Home Trading System, like the automated trading system, is an
order placing system that is essential to build a cyber securities trading
system.
The Home Trading System was introduced on April 1, 1997, to
facilitate the order submission by investors, transmission of quotations by
securities companies, and confirmation of trade execution and trade
details, thus improving the efficiency of trading system and enhancing
the convenience of market participants.
* The Home Trading System accounted for about 69.9% of total trading
volumes (41.3% of total trading value) in 2006.
LOrder submission using Home Trading System
To submit orders through the Home Trading System, a customer must
first enter into a contract for use of home trading system with a
securities company.
A. Receiving written orders
B. Receiving orders over telephone and facsimile, etc.
C. Receiving orders through electronic communication method
2. Method of Receiving Trade Entrustment
KOREA
EXCHANGE
The home trading system can utilize Internet, securities company
network, industrial communication network, etc. and an order can be
submitted through PC without physically visiting the offices of a
securities company.
L Since the member securities companies have the responsibility to maintain
fair and orderly trading system and protect bona fide investors, they are
required to refuse to accept the entrustment of unlawful orders such as
the followings :
The orders that breach the Securities and Exchange Act, e.g., the
Disgorgement of Short Swing Profits by Insider (Article 188),
Prohibition of Practices of Making Use of Undisclosed Information
(Article 188-2) and Prohibition of Unfair Trading Such as Price
Manipulation, etc. (Article 188-4);
The orders that infringe the regulations relating to the restriction of the
quotations for short sale and the price limit of quotations for short sale;
and.
The new orders placed and the request for withdrawal of cash or
securities by a customer who has accumulated unsettled balance.
Good faith deposit is a cash or security deposit that a customer makes
with a securities company at the time of entrusting orders, to assure
the fulfillment of settlement.
It is a kind of collateral to be used in case of settlement default, and allows
the securities company to recover the claims.
3. Refusal to Accept Entrustment of Orders
4. Good Faith Deposit
A. Significance
KRX
In the past, the KRX set the minimum rate that the member securities
company must collect as good faith deposit, but on April 1, 1998, the
regulation was amended to permit the member companies to self-
regulate the rate.
By letting the member companies, who are responsible for the trade
settlement, to self-regulate the credit of their customers, the KRX
responds to the changing environment of global market and make its
trading regulations compatible with the global standards.
* As of August, 2006, most of the member companies collect 40% of the
entrusted amount as good faith deposit (100% of entrusted amount in case of
administrative or abnormally rising issues) for the buy orders and full entrusted
amount for the sell orders.
To enhance the utility of securities and to allow use of securities
instead of cash, the KRX designates certain securities as substitute
securities, which can be used for margin payments, various guarantee
payments and deposit payments, as collateral securities.
The securities that can be used as substitute securities include the
listed stocks (excluding the administrative issues, issues of investment
caution in the Kosdaq Market, issues for liquidation trading, issues of
which trading is suspended under the criteria for delisting), ETFs, listed
bonds (excluding the administrative issues), listed KDRs, stocks and
beneficiary certificates pursuant to the Act on Business of Operating
Indirect Investment and Assets, listed beneficiary certificates issued by
the Korea Housing Finance Corporation and Korea Mortgage
Corporation.
In case of listed stocks, 70% of previous day's closing price is the
value of substitute security, and in case of listed bonds or beneficiary
certificates, 70% ~ 95% of base price is the value of substitute
security. (Article 88 of the Stock Market Business Regulation; Article 43
of the Kosdaq Market Business Regulation)
B. Self-regulation of good faith deposit rate
C. Substitute securities
KOREA
EXCHANGE
L Current Good Faith Deposit account trade causes excessive trading
with leverage, increasing short term investment pattern and 'Overdue
Amount'. In other words, Good Faith Deposit account trade increases
daily market volatility and settlement uncertainties.
* Overdue Amount is the amount paid by securities company if an investor fails
to pay the rest of the amount by the settlement day.
L To prevent these negative effects, Good Faith Deposit rate shall be
raised to 100% for 30 days to those investors causing non-settlement,
Overdue Amount, effective from May 1, 2007.
Account with Overdue Amount includes non-settlement by the
settlement day and also selling of stocks before the settlement day (T+
2 days) which causes non-settlement.
However, exceptions are allowed where Overdue Amount is too
small (KRW 100 thousands or less) or where Overdue is caused by
time difference in international transaction.
L Also, to prevent settlement failures for the issues with low liquidity, when
receiving entrustment of order for an issue with 50,000 or less listed
shares, the member companies are required to collect all of selling shares
as good faith deposit.
* In this case, in case of the securities that the member company is certain about
their entry into the customer'account book by the settlement deadline as a
result of the execution of order in the market, capital increase or right exercise, it
is deemed that the good faith deposit has been collected within the quantity of
concerned securities
D. Execeptions to collection of good faith deposit
KRX
KOREA
EXCHANGE
LThe member securities companies collect the brokerage commission
from their customers for the orders of which trade has been executed at
the time of settlement.
The commission fee is the compensation for the services rendered by
the member securities companies in relation to the securities trading.
LIn order to differentiate the services rendered by the securities companies
and ease the regulations, the commission fee rate was totally deregulated
on September 1, 1997. However, when intending to establish new
commission fee schedule or revise the existing schedule, for the
protection of the investors, the securities companies are required to make
public the details of their fee schedule or amendments thereof before it
becomes effective.
The member companies are also required to notify their fee schedules
to the KRX within 5 trading days of the implementation (Article 82-2
of the Stock Market Business Regulation; Article 51 of the Kosdaq
Market Business Regulation).
5. Brokerage Commission
KRX
Korea Exchange
III. Trading System
III. Trading System
1. Market Operation
A. Trading hours
B. Trading days
Quotation Receiving Time
Trading Time
Pre-hours trading After-hours trading
7:30 8:00 8:30 9:00 15:00 15:10 18:00
Trading days are from Monday to Friday and the market is closed on the
following days and weekend.
Regular Session
>
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LThe KRX consolidated the morning and afternoon sessions into a single
session on May 22, 2000.
LTo enhance the user convenience, the KRX operates the regular session
and off-hours session, and to determine the opening price, the quotations
are received from 08:00. The off-hours session is divided into the pre-
hours session and the after-hours session.
Quotation receiving hours and trading hours
Trading Session Quotation Receiving Hours Trading Hours
Regular Session 8:00 ~ 15:00 9:00 ~ 15:00
Pre-hours Session 7:30 ~ 8:30 7:30 ~ 8:30
After-hours Session 15:00 ~ 18:00 15:10 ~ 18:00
KOREA
EXCHANGE
21 III. Trading System
The public holidays according to the Regulations on Government and
Public Offices Holidays_
The Labor day
December 31 (if it is Sunday or Saturday, the last trading day of the year)
Additionally, the days that is deemed necessary for the market
management
Trading unit is the minimum amount of securities accepted for trading,
which is established to optimize supply and demand in the market.
Presently, the trading unit in the Stock Market is 10 shares and in the
Kosdaq Market is 1 share. However, for the trading unit of stocks, of
which the base price is KRW 50, 000 or higher, is 1 share in the Stock
Market. The trading unit in the off-hours session is 1 share.
Quotation price unit is the smallest price unit used in quoting, which is
determined by the KRX.
Quotation Price Unit (Unit : KRW)
C. Trading unit
D. Quotation price unit (tick size)
5
10
50
100
500
1,000
5
10
50
100
100
100
Quotation Unit
Stock Market Kosdaq Market
Quotation price unit for ETFs is KRW 5 (for the better benchmarking, the quotation price unit
was reduced from KRW 10 to KRW 5 on July 18, 2005)
Share Price
less than 5,000
10,000
50,000
100,000
500,000
500,000 or more
5,000
10,000
50,000
100,000
KRX
LOrder is an intention of trade that the customer expressed to the
securities company, and quotation is the bid or ask expression that the
member securities company placed in the market to carry out the trade
in its name.
(1) Limit order
Limit order is the most common type of order in the market, which
specifies the intention to trade at a specified or better price. As it
specifies the possible trading price, a bid order can be traded at the
price specified or lower and a ask order can be traded at the price
specified or higher.
E.g.) A bid limit order of KRW 10,000 is traded at KRW 10,000 or
any price lower, and a ask limit order of KRW 10,000 is traded
at KRW 10,000 or any price higher.
Limit order is useful to investors because the order cannot be executed
at the prices which are unfavorable than the specified.
However, the disadvantage of limit order is that if there is no
counter order that satisfies the specified price, the order cannot be
executed.
* It should be noted that only limit order is permitted for warrants, ELWs, and
beneficiary certificates.
(2) Market order (introduced in the Stock Market on November 25, 1996
and in the Kosdaq Market introduced on July 1, 2002)
Market order is an intention to trade at the best price available or at
the price established in the market. Thus, the issue and trading
quantity are specified, but the price is not specified.
Market order has the advantage in that it can be executed without
delay, i.e., when it is submitted, because it has price flexibility.
But, in case where one (bid or ask) side market orders are continually
received while there is insufficient order on the other side, there is a
danger of sudden price fluctuation. Therefore, the market order is not
permitted for the securities that are not subject to the daily price change
limit (e.g., warrants, ELWs, subscription rights, bonds) and the securities
with low liquidity.
E. Types of order (quotation)
KOREA
EXCHANGE
(3) Limit-to-market-on-close order (introduced in the Stock Market on
November 25, 1996; in the Kosdaq Market on October 24, 2005)
Limit-to-market-on-close order is the order that is treated as a limit
order during the trading session, but converted into the market order
at the beginning of the quotation receiving hours for determination of
the closing price of the day (10 minutes before the market closing time).
Limit-to-market-on-close order make can maintain the function of
securing the order price, while providing the flexibility to convert it into
a market order if the order is not executed by the market closing, thus
safeguarding the liquidity.
(4) Immediately executable limit order (introduced in the Stock Market on
January 26, 2004; in the Kosdaq Market on July 26, 2004)
The immediately executable limit order is an order affixing the
condition to trade at the best price of counter side orders, thus allowing
an immediate execution of an order.
For instance, in case of receiving an ask order, the highest bid order
price at the time of receipt of the order is the price of immediately
executable limit order, and in case of receiving a bid order, the lowest
ask order price at the time of receipt of the order is the price of
immediately executable limit order.
(5) Best limit order (introduced in the Stock Market on January 26, 2004; in
the Kosdaq Market on July 26, 2004)
Best limit order is an order affixing the condition to trade at the best
price of the same side orders.
For instance, in case of an ask order, the lowest ask order price at the
time of receipt of the order is the price of best limit order, and in case
of a bid order, the highest bid order price at the time of receipt of the
order is the price of best limit order.
(6) Target price order (introduced on May 30, 2005)
Target price order is an order specifying the intention to execute the
order at a target price such as VWAP (\olume Weighted Average
Price), which will be set later on or after the market closing, or at the
price close to the target price.
A member company that received a target price order can place the
quotations after subdividing the order to ensure that the execution of
the order at the price close to the target price. The target price order
is submitted as either a limit order or market order.
KRX
Target Price Order and Quotation
Investors
Target price order
(VWAP)
Condition affixed on Orders (The Stock Market introduced on January 26,
2004; the Kosdaq Market introduced on July 26, 2004)
LTo facilitate trading convenience of investors while making it possible to
deploy various investment strategies, the KRX allows affixing of following
conditions to the limit order, market order and immediately executable
limit order.
IOC (Immediate or Cancel)
The order requiring that all or part of the order quantity to be
executed as soon as the member company places a bid or ask
quotation, and the quantity not executed to be automatically cancelled.
FOK (Fill or Kill)
The order that requires to cancel the entire quantity, if the entire
quantity of the order is not executed immediately after the member
company places the quotation.
- No condition may be affixed to the limit-to-market-on-close order
and best limit orders.
(1) Rationale
LUpper and lower limit on daily stock price change has been set to facilitate
the establishment of fair market price and protect investors from the
sudden, drastic fluctuation of stock prices, thus ensuring an orderly trade.
L However, there is a disadvantage in that the artificial price control may
delay the establishment of balanced price, i.e., undermining the price
identification function.
F. Price change limit
Securities
Company
KRX
Limit or market
KOREA
EXCHANGE
(2) Price change limit in the KRX Markets
Price change limit in the KRX Markets is 15% of the base price of
the day. This means that no trade can be executed at the price in excess
of j15% of the base price of the day.
However, the price change limit is not applied to trading of the issues
of liquidation trade, ELWs, subscription warrants and subscription right
certificates.
(1) Definition
Base price is the price used as the basis in determining the price
change limits of stocks, ETFs, beneficiary certificates, etc. during the day.
(2) Application of base price
Generally, the closing price of previous day is used as the base price of
the day. However, in case where the closing price cannot be used as
the base price, a new base price may be determined. For example:
In case where there is a need to make the stock prices consistent
before and after the capital increase, stock dividend, share split and face
value consolidation, the theoretical price computed using the standard
formula becomes a base price; and
In such cases as the initial listing and capital reduction, the base price
is determined in the market by way of single price auction.
(3) Special quotation price
To insure that the stock price reflects the market movements even if
no trade has been executed, when there are the bid (ask) prices higher
(lower) than the base price, the highest bid (lowest ask) price is construed
as the closing price of the day and used as the base price of the next
trading day.
(1) Purpose
Real time quotation information is made public mainly to help the
investors in making their investment decisions, while enhancing the
services provided by the securities companies and facilitating efficient
identification of market price.
G. Base price
H. Dissemination of quotation information
KRX
(2) Range of quotation information published
LDuring continuous auction
Ten successive best quotes per bid and ask, respectively, the quotation
quantities at such prices and the total of such quotation quantities.
* Quotations submitted by liquidity providers for ELWs are published separately.
LDuring single price auction
Three successive expected best quotation prices and quantities per bid
and ask, including the expected matching price and expected
matching quantity.
LExpected matching price is published in real time. During the quotation
receiving hours for the determination of opening price, such quotation
information is published from 10 minutes after the beginnings of the
quotation receiving hour.
Because of the need to execute the trade efficiently at the price most
favorable, the competition among the quotations is unavoidable.
Accordingly, the established principle is necessary to determine the
execution priority among the quotations and the trade is executed in
accordance with the following principles:
(1) Price priority
In case of bid quotations, the quotation with higher price has priority
over the quotations with lower prices; and in case of ask quotations, the
quotation with lower price has priority over the ones with higher prices.
Market quotations have priority over limit quotations. However,
because of the application of price change limit, the ask market quotation
is construed as having the same priority as the ask limit quotation at the
lower price limit and the bid market quotation is construed as having the
same priority as the bid limit quotation at the upper price limit.
(2) Time priority
In case of the quotations at the same price and the market quotations,
the quotation received earlier has priority over those received later.
2. Trade Execution
A. Principle of trade execution
KOREA
EXCHANGE
LExamples of order execution
As shown below, quotation is executed first in accordance with the
price priority.
Also, among the quotations at the same price, quotation , which was
received earlier, is executed before execution of quotation .
Example of Order Matching
, and are the receipt sequence of quotations.
(3) Exceptions to the time priority (Simultaneous Quotations)
(a) Exceptional cases
When the opening price is expected to be the upper or lower limit
price, the time priority is not applied to the quotations at the upper and
lower limit price (including the market quotations) that participated in
the determination of the opening price.
Such simultaneous quotation system is applied not only to the
determination of opening price but also to the determination of first
price at the time of trade resumption after the activation of circuit
breakers, system failure and temporary trade suspension due to rumors,
etc.
However, the simultaneous quotation system is not applied to the
determination of the closing price.
(b) Reasons for exceptions
If trade is executed according to the time priority when the opening
price is the upper or lower limit price, the investor who placed an
order at the upper or lower price limit, which were submitted later,
cannot submit a correction order at more favorable price because of
the price change limit and the order cannot be executed because of
the low time priority given to it.
Meantime, if the opening price of the day or the first price determined
at the time of trade resumption is not the upper or lower price limit,
the investor can submit a correction order at more favorable price and
is able to change the priority of the order, thus executing the order.
KRX
Ask Quotes (Quantity) Price Bid Quotes (Quantity)
20,150 10(Highest Bid)
800, 200 20,100 200, 300
100, 100 20,050 20
80, 100 20,000 200, 100
20(Lowest Ask) 19,950
In order to meet the demand of investors who wish to execute their
orders and ensure the fairness in executing orders at upper or lower price
limit, the time priority is not applied to the orders placed at upper or
lower price limit.
(c) Execution priority of simultaneous quotations
Customer priority
Since the securities companies conduct both the brokering and
dealing, to prevent the conflict of interests and protect the investors,
the customer orders have priority over the securities companies'
proprietary account dealing.
Quantity priority
LAmong the customer account quotations and among own account
quotations, the quotation with a larger quantity has priority over the
quotations with smaller quantities.
LQuantity allocation method
In descending order of quotation quantity, from the largest to the
smallest, until the entire quotation quantity is executed.
10 times of trading unit (100shares) 50 times of trading unit (500shares)
100 times of trading unit (1,000shares) 200 times of trading unit
(2,000shares) 1/2 of residual quantity Entire residual quantity
To give more trading opportunities to the investors with small quantity
quotations, the allocation method is broken down into 6 steps
(introduced on August 25, 2003).
* Before August 25, 2003, the quantity was allocated through 3 steps: 10 times
of trading unit (100shares) 1/2 of residual quantity Entire residual quantity.
<Example of Execution of Simultaneous Quotations >
L In case where the opening price is determined at the upper price limit
(KRW 20,150), the quantity of ask quotes are allocated to the bid quotes
according to the quantity priority.
KOREA
EXCHANGE
Ask Quotes (Quantity) Price (KRW) Bid Quotes (Quantity)
LQuotations (before the opening price is decided)
4,000
1,500 600
1,700 1,500
1,300 1,000
800
700
(6,100)
(3,200)
(2,300)
(800)
(700)
13,100
20,150
20,100
20,050
20,000
19,950
Total
(16,200)
16,200
Quote
(10,000 shares)
Quote
(5,000 shares)
Quote
(1,000 shares)
Quote
(200 shares)
10 times of
trading unit
50 times of
trading unit
100 times of
trading unit
200 times of
trading unit
[1/2 of
remainder
[Remainder
Number of
executed shares
(13,100)
100
500
1,000
2,000
3,200
800
7,600
100
500
1,000
2,000
700
-
4,300
100
500
400
-
-
-
1,000
100
100
-
-
-
-
200
1,000 200
10,000 5,000
500 700
400
KRX
13,100 shares of ask quotes need to be allocated to 4 bid quotes at the upper
price limit requesting 16,200 shares.
and are the receipt sequence of quotations.
LResult of trade execution (at the time of determining the opening price)
Allocation begins with the quote with the largest quantity, i.e., quote
B. Method of trade execution
LStatus of quotations (after the determination of the opening price)
Ask Quotes (Quantity) Price Bid Quotes (Quantity)
3,000[1,000500 20,150 2,4007001,000[500[
After determining the opening price, the reminder of shares at the upper
limit price is 3,100 (i.e., and ). Then, the quotations [~ are received
subsequently.
L Result of trade execution (after the determination of the opening price)
[- 2,400 shares, [- 600 shares, - 100 shares, -[ 900
shares, -[100 shares, -[400 shares
Quantity allocation is made to the simultaneous quotes, i.e., up to the quote ,
but the quotations received thereafter are executed according to the time
priority.
(1) Type of trade execution
LIn accordance with the competitive relationship between the supply and
demand, t he execut i on met hod i s grouped as f ol l ows:
Competitive Auction: Trading between many buyers and many sellers.
Negotiated Transactions: Trading between one buyer and one seller.
One-Way Auction: Trading between a single buyer and many sellers
or vise versa.
LCompetitive auction is the most commonly used trading method in Korea.
(2) Competitive auction methods in the KRX Markets
(a) Single price call auction (periodic call auction)
LApplication time
As shown Table below, the single price auction method is utilized
when there is a danger of the stock price being distorted due to the
interruption in trading, e.g., the closing of trading session and trade
suspension.
KOREA
EXCHANGE
- Quotations received from the start
of quotation receiving hour to the
opening of regular-session
- Quotations received during the
first 10 minutes after resuming of
market or trade (depend on the
situations in case of the computer
system failure)
- Quotations received during the last
10 minutes before the market
closing time.
- Quotations received for every 30-
minutes interval after the market
opening
- Quotations received for every 30-
minute interval after opening of
off-hours session.
Application of single price auction
Quotations participating in single
price auction
- When determining the opening
price of the day at the time of
opening of the regular-session
- When determining the opening
price at the time of reopening of
the market after halting the whole
or a part of market
- When determining the first price
at the time of trade resumption
after trade suspension (including
the trade suspension after the
computer system failure)
- When determining the closing
price of the day
- When trading the issues of
liquidation sale
- When determining the price
during off-hours single price
trading
LExecution method
The aggregated quantity of ask quotes and aggregated quantity of bid
quotes are matched at matching price", and the trade between the
matched quotes are executed according to the priority of the quotes.
Total quantity of ask quotes at the prices lower than the matching
price and the bid quotes at the prices higher than the matching price.
At the matching price, total quantity of either ask or bid quote.
LExample of trade execution
As shown below, subsequent to matching sequentially the highest bid
quote with the lowest ask quote, it is found that the largest quantity
can be traded at KRW 15,250. Therefore, trades are executed at that
price, and at the matching price of KRW 15,250, the trade is executed
according to the time priority.
KRX
LHowever, in case of the opening price is determined at the upper or
lower price limit, the time priority is not applied (see the Exception to
time priority).
Execution Method during Single Price Auction
Ask Price(KRW) Bid
15,400 1000
15,350 300
15,300 200 300

15,250

2,000 1,000 500 100 100 200
150 15,200
500 500 15,150
500 15,100
150 15,050
: un-executed quotes : partially executed quotes : executed quotes
and , etc. are the order of quotation receipt.
(b) Extension of quotations participating in single price auction (Random End)
LWhat is random end
Random end is a system that delays the determination of the opening
or closing price when the opening or closing price deviates substantially
from the expected price published immediately before the single price
auction. Random end system is also applied to the off-hours single
price auction.
LThe KRX introduced the random end system to prevent the price
distortion caused by the deceptive quotations and to enhance the market
transparency and identification of fair and impartial price.
LDetails of Random End
When the opening price or closing price varies more than 5% (3% in
case of off-hours single price auction) from the expected matching
price that is published from 5 minutes before the expected time of
single price auction, the determination of the opening or closing price is
delayed up to 5 minutes and the price is determined randomly within
that 5 minutes.

2,000 1,000 500 100
KOREA
EXCHANGE
The Stock Market tightened the condition for applying the random
end on October 30, 2006. That is, the random end is not applied
unless the provisional opening (closing) price rises or falls more than
1% from the most recent market price.
Example of Random End
Expected
matching price
Highest expected price
postponed within 5 minutes
provisional opening price
9:00 8:55
Lowest expected price
10,500
10,000
9,500
+5%
-5%
At 09:00, the provisional opening price is KRW 10,000. And if that price
deviates 1% or more from the base price, the random end is triggered.
During the postponement period, new quotations and correction and
cancellation quotations may be placed.
(c) Individual auction at multiple price (Continuous Auction)
LApplication time
During the trading sessions where single price auction is not applied,
all trade is executed by way of continuous auction.
Continuous auction facilitates a speedy trading that utilizes the latest
market data. Trading is possible whenever suitable quotes with
matching prices are received and the multiple matching prices are
continually formed, thus being called continuous auction".
LExecution method
Among the competing bid and ask quotes, the trades between the bid
and ask quotes that match the price and quantity are continuously
executed.
LExamples of trade execution
As shown below, the bid quotes and ask quotes competes, and when
the lowest ask quote and the highest bid quote are matched; the
trading is executed at the price of the quote received earlier.
KRX
Ask Price Bid Result of execution
10,600
10,500
200 10,400
10,300 200
200 10,200
10,100
10,000
9,900
9,800
10,600 500
10,500
10,400
10,300
200 10,200
10,100 200
10,000
200 9,900
9,800
Example 1
are the receipt sequence of quotations
1) -: 200 shares at KRW 10,300
Example 2
are the receipt sequence of quotations
1) -: 200 shares at KRW 10,600
,) -: 200 shares at KRW 10,600
KOREA
EXCHANGE
10,600 100
10,500
10,400 [100
10,300
200 10,200
10,100 200
10,000
200 9,900
9,800
(1) Concept
The circuit breakers is a system which suspends the trading for a fixed
time to provide a cooling-off period to the investors, when KOSPI or
KOSDAQ falls below certain level (10% from the previous day's
closing price).
The Stock Market i ntroduced the ci rcui t breakers system on
December 7, 1998 and the KOSDAQ Market introduced it on
October 15, 2001.
(2) Necessity for circuit breakers
It is a price stabilizing mechanism by pacifying the overreaction in the
Markets after the KRX increased the daily price change limit.
When stock prices plunge suddenly, influenced by the market
sentiment, the investors tend to place orders on one side without a
rational consideration, thus increasing the possibility of market failure.
For that reason, a price stabilizing mechanism is needed to protect the
investors and pacify the Market.
Example 3
[are the receipt sequence of quotations
1) -: 100 shares at KRW 10,600
,) -: 200 shares at KRW 10,100
) -[: 100 shares at KRW 10,200
3. Market Management
A. Temporary suspension of market (Circuit Breakers)
KRX
(3) Guideline in activation of circuit breakers
LTo activate only in case of abrupt drop of stock price index
It is a mechanism to calm down the investor sentiment in case of the
sudden price plunge, thus it is not activated when the index soars.
LTo activate only in a special situation
Frequent trade suspension increases the uncertainty in the market,
thus confusing the investors.
Circuit breakers is activated only when there is a possibility of drastic
price fall caused by the investor panic subsequent to the sudden drop
of stock price index.
LTo close the market as scheduled
Closing the market earlier than the scheduled time may cause
unexpected losses to some investors, who conduct their trade
assuming the normal closure of market. Therefore, the market closes
at the scheduled time.
(4) Details of Circuit Breakers System
LPrerequisites for activation
Circuit Breakers is triggered only when KOSPI or KOSDAQ falls at
least 10% over the previous day's closing price and such situation
continues at least for 1 minute.
Circuit Breakers is triggered only once a day, and it is not triggered
during the last 40 minutes before the market closing time.
LEffect of circuit breakers
If circuit breakers is activated, trading of all issues (including the
quotation receiving) is suspended for 20 minutes. However, it is
possible to place cancellation quotations.
Trading of derivatives products that use KOSPI or KOSDAQ as its
underlying index is also suspended, but the trading of bonds is not
suspended.
LTermination of circuit breakers (resumption of trade)
Trading is resumed 20 minutes after the trade suspension.
The first price at the time of trade resumption is determined by way of
single price auction after receiving quotations for the first 10 minutes
after the trade resumption. Once the first price is determined, the
trading is executed by way of the continuous auction.
KOREA
EXCHANGE
(1) Specifics
When there is a need to bring the corporate information to investors'
attention following the rumors, etc. about a listed stock, or normal
trading of an issue is not possible due to the influx of excessive
quotations, the trading of concerned issue is suspended temporarily to
facilitate the reliable trading in the Markets.
(2) Causes of trade suspension
L Cases where the price or trading volume of an issue fluctuates or is
expected to fluctuate drastically in conjunction with the following rumors,
etc. :
Examples of Activation of Circuit Breakers
Date
April 17, 2000
(Stock Market)
September 18, 2000
(Stock Market)
September 12, 2001
(Stock Market)
January 23, 2006
(Kosdaq Market)
Reasons for Index Fall
Black Friday in U.S. (Dow and Nasdaq fell
5.56% and 9.67%, respectively)
US markets tumbled; Ford gave up the acquisition
of Deawoo Motors, crude oil price jumped
9.11 terrorist attack on the World Trade Center
US markets tumbled; plunge of theme stocks
B. Trade suspension of individual issue
KRX
Rumors that a check or note i ssued by a l i sted company i s
dishonored, or banking transaction of a company is suspended or
prohibited;
Rumors that the business activity is suspended in whole or in part;
Rumors about the bankruptcy, dissolution, or filing of an application
for commencement of company rehabilitation procedures or de facto
commencement of the rehabilitation procedures thereof;
Rumors about the adverse opinions, disclaimer opinions or qualified
opinion due to the limit placed on the scope of audit in the audit
report or the capital impairment of over 50/100; and
Rumors about the adverse opinions or disclaimer opinions in the audit
review of semiannual report.
LCase where trade execution is delayed for at least 60 minutes due to the
influx of excessive quotations
(3) Resumption of trade
LIn case of trade suspension caused by rumors, etc.
Trading is resumed 30 minutes (60 minutes in the Kosdaq Market)
after disclosing the inquired disclosure about the cause of trade suspension.
However, if the disclosure time is before the opening of the regular-
session, trading resumes 30 minutes (60 minutes in the Kosdaq
Market) after the opening of regular-session, and if the disclosure time is
during the last 60 minutes (90 minutes in the Kosdaq Market) before
the closing time of the regular-session, trading resumes on the next
trading day. In case where the rumors, etc. persist after the inquired
disclosure or the details of inquired disclosure come under the criteria for
delisting or designation as administrative issue, the trade resumption
may be postponed.
LIn case of trade suspension caused by excessive quotations
Trade resumption time is determined by taking into account the
market conditions, e.g., quotation and trading volumes.
(1) Ex-Dividends
LDefinition
Ex-dividend means that the right to receive the dividend of concerned
fiscal year's profit has been expired and it is a market measure taken
to notify the investors of the expiration of dividend rights.
C. Ex-dividends and Ex-rights
KOREA
EXCHANGE
By taking such measures as ex-dividend, the KRX oversees the rational
determination of stock price.
LEx-dividend date
The investors who have purchased the shares become the shareholder
after the trade has been settled. As the trade is generally settled on
the 3rd day from the trading day, the ex-dividend date is the trading
day before the record date, on which the shareholders entitled to
dividend are determined.
* If the record date is non-trading day, the previous trading day becomes the
record date.
Also, if the record date falls in the period during which trading is
suspended (excluding the first day of trade suspension), the trade
resumption day is the ex-dividend date.
12/28 12/29 12/30 12/31 1/1 1/2
Closing price
with dividend
right
Action day
for
Ex-Dividends
Last trading
day
(base day)
Non-trading
day
Holiday Settlement day
for trade
executions on
12/29
LBase price for ex-dividend issue
Base price for ex-dividend issue is re-determined to make the price per
share consistent before and after paying the stock dividend.
* Base price for Ex-Dividend Issue =
(2) Ex-rights
LDefinition
Ex-right refers the termination of the right to receive the new stocks
subsequent to the capital increase, and it is a market measure taken to
inform the investors of the termination of subscription rights when a
listed company undergoes a capital increase.
(Closing price of cum dividend issue
Number of shares before dividend)
Number of shares after dividend
KRX
LEx-rights date
In common with the ex-dividend date, taking into account the time
required for the settlement of trade, the day before the record date for
new share allocation becomes the ex-right day.
This means that to acquire the subscription rights, the stock should
be purchased at least 2 days before the record date for new share
allocation.
LBase price of ex-rights issues
As a theoretical price that reflects weakening of the closing price of
cum ex-right share caused by the capital increase, the base price of ex-
rights issue is the adjusted price that ensures the consistency of the
share prices before and after the capital increase.
* Payment for capital increase without consideration is deemed to be 0".
(1) Summary of regulation
The administrative issue is the issue that is likely to come under the
criteria for delisting, for such reasons as the worsening business
performance, noncompliance with the share distribution requirements
or the liquidity dropping below the required level.
Designation as administrative issues is a warning notice to the
investors that the issue comes under the delisting criteria. At the same
time, by delaying the delisting for a fixed period, the concerned company
is given time during which it can attempt to normalize its business
operation.
(2) Trading method for administrative issues.
In the past, the trading method of administrative issues was different
from that of non-administrative issues, but now the same trading method
is applied to both the administrative and non-administrative issues.
(3) Trading method for issues of liquidation trade
To give the last opportunity to cash in the shares, the issues to be
delisted are allowed to be traded for 7 trading days.
D. Designation of administrative issues
* Base price for Ex-Rights issue =
[(Closing price of cum rights issue
Number of shares before capital increase) +
Payment for paid-in capital increase*]
Number of shares after capital increase
KOREA
EXCHANGE
During the regular sessions (9:00 ~ 15:00), the issues of liquidation
trade are traded by means of single price auction at every 30-minute
intervals (13 times a day), and during the off-hours session, they are
traded just like normal issues, and the price change limit (excluding
the regular session block trading) is not applied.
(1) Summary of regulations
In case where the price of an issue surges drastically within a short
time, such issue is designated as abnormally rising issue to bring the
matter to the attention of investors and prevent unfair trading. This is
a market measure taken to contain the speculative demands and
stabilize sudden rise of price.
When designated as abnormally rising issue, new margin trading of
such issue is restricted (Article 5-8 of the Regulation on Supervision of
Securities Business). It should be noted that most securities companies
collect 100% of trading amount as the good faith deposit.
(2) Designation as abnormally rising issues in the Stock Market
(a) Designation criteria
LGeneral case (Sudden price jump)
Case where the share price rose 75% or more during the recent 5
days and such situation lasts for 2 consecutive days, and
On the basis of the 2nd day, the price gained during the recent 6
days is at least 4 times the gain of the price index of the same industry
group for the same period.
Designation of Abnormally Rising Issues
E. Designation as abnormally rising issues

Price elevation 75% or more
6 previous days stock price elevation rate is 4 times of
the index of the same industry
T-5day T-4day T-3day T-2day T-1day T-day T+1day T+2day
* Price elevation(%)= 100
Comparative days closing price - base days closing price
Base days closing price
KRX
LSpecial case of preferred share (Price deviation from the common share)
The preferred stocks may be designated as abnormally rising issue not
only because of the sudden price surge, but also because of the price
deviation from the common stock.
When the closing price of prepared share on the most recent trading
day is 1.3 times or more of the price of common share and the price
rose at least 30% in the recent 3 days, such preferred issue is designated
as abnormally rising issue. However, in case where the price increase of
preferred share is less than 1.5 times of the price increase of common
share, it is not designated as abnormally rising issue.
Designation of
Abnormally
Rising Issues

Preferred stocks price elevation 30% or more &
preferred stocks price elevation common stocks
price elevation1.5
T-3day T-2day T-1day T-day T+1day
* Price elevation(%) = 100
T days closing price - (T - 3day) closing price
(T - 3day) closing price
When a preferred share comes under both criteria, i.e., the general
case and the special case of preferred share, it is designate under the
special case of preferred share.
When a preferred stock that has been designated as abnormally rising
issue due to the sudden price surge comes under the criteria for the
special case of preferred share, it is re-designated under the latter criteria.
(b) Criteria for release from designation as abnormally rising issue
LGeneral case of sudden price jump
The closing price of the day (T+n, n4), which is after the 3rd day
from the designation day (T+2day), is less than the closing price of 3
days ago (T+n-3 day), the issue is released from the designation as
abnormally rising issue. However, the closing price of the day is higher
than that of the previous day, the release is postponed.
Closing price of preferred stock > closing
price of common stock 1.3
KOREA
EXCHANGE
Also, when 10 days have elapsed from the designation day, the issue
is released from the designation on the next day.
LSpecial case of preferred share (99. 9. 21)
When the closing price of preferred share on the day (T+n day, n3),
which is after the 3rd day from the designation day (T+1), is less than
the closing price of the day before the designation day (T day), the
issue is released from the designation. However, if the closing price of
the day making decision on the release (T+n day, n3) is higher than
that of the previous day (T+n-1 day), the release from the designation
is postponed.
g
T+n days closing
price < T+n-3 days
closing
price &
T+n days closing
price previous (T+n-1 day)days
closing
price
T-day T+1day T+2day T+3day T+n day T+n+1day
Release from designation of Abnormally

Rising Issues
g
T+n days closing price < T days closing price &
T+n days closing price previous (T+n-1 day)days closing price
T-1day Tday T+1day T+2day T+n day T+n+1day
Release from designation of Abnormally

Rising Issues
Also, if the closing price of preferred shares is lower than that of
common share, the issue is released from the designation.
(c) Suspension of trading of abnormally rising issues
L In case where the price of preferred share continually rises, after it has
been designated as abnormally rising issue for the reason of the price
deviation from that of common share, trading of such issue is suspended.
KRX
LCriteria for trade suspension
In case where the price of preferred share on the day (T+n day, n3),
which is after the 3rd day from the designation day (T+1), rose 20% or
more over the closing price of the day before the designation day (T
day), trading of such issue is suspended for 3 days. Also, in case
where the price of an issue rose 20% or more during the recent 3
days, which are after 3 days from the trade resumption day, trading of
such issue is suspended. In such case, no limit is placed on the number
of times the trading is suspended.
However, when the closing price of the day when the decision on
trade suspension is made (T+n days, n
3) is lower than that on the

day before (T+n-1 day), the trade suspension is postponed because
there is a possibility that the price of the preferred share drop in future.
Trade suspension
T-1day T day T+1day T+2day T+n day
Designation of Abnormally
Rising Issues
T+n days closing
price T days
closing
price1.2 &
T+n days closing
price T+n-1 days
closing
price)
LExceptions to trade suspension and trade resumption

In case where the closing price of preferred share falls below that of
common share, the issue comes under the criteria for delisting or
trading is suspended to apply the issue using the opening price as the
base price, the concerned issue is released from the trade suspension.
Also, trading of an issue is not suspended when the investment
decision is necessary to exercise the rights against the concerned listed
company.
Price elevation (%) = 100

(T+n days) closing price - (T days) closing price
T days closing price
KOREA
EXCHANGE
- For example, when the shareholders have been asked to submit the stock
certificates to the concerned listed company in relation to merger and
acquisition, etc., trading of concerned issue is not suspended for 2 days,
i.e., from 4 days to 2days before the submission deadline of the stock
certificates; and
- In case of ex-dividend or ex-rights, trading of concerned issue is not
suspended for 2 days, i.e., from 4 days to 2 days before the record date.
(3) Designation of abnormally rising issues in the Kosdaq Market
(a) Designation criteria
In case where the price of an issue rose 75% or more during the recent
5 days and such situation lasted for 2 consecutive days; and
The closing price on the 2nd day is the highest among and closing prices
of the recent 20 days; and
The price gained in the recent 5 days is 4 times or more of the gain of
KOSDAQ index in the recent 20 days, such issue is designated as
abnormally rising issue.
T-19day T-18day T-5day T-4day Tday T+1day T+2day
Price elevation 75%

or more
& Recent 20 days price
elevation is 4 time of
Kosdaq index
Highest closing price
in 20 days
* Price elevation(%) = 100
Comparative days closing price - base days closing price
Base days closing price
KRX
(b) Criteria for release from the designation
Then the closing price of the day, which is after 3 days from the
designation day, has fallen at least 10% from the highest closing price
in the recent 5 days or is lower than the closing price of the day before
the designation day, the concerned issue is released from the
designation as abnormally rising issue; and
When 10 days have elapsed since the designation day.
(c) Trade suspension of Abnormally Rising Issues
L In case where the price of the preferred share, new share and stock
issued by an investment company continues to deviate from the price of
common shares, the price of old common shares or the net asset value
after it has been designated as abnormally rising issue, the trading of
such issue is suspended.
LCriteria for trade suspension and suspension period
The first time suspension
In case where a preferred share is designated as abnormally rising
issue and its price deviates 2 times or more from the price of common
shares, etc, the trading of such preferred share is suspended for 3 days.
The second time suspension
In case where the closing price on the day (T+3+n), which is after 3
days from the day trading is resumed after the first trading suspension,
deviates 2 times or more from the closing price of common shares, the
price of old common shares or the net asset value and the price gain
in the recent 3 days is 20% or more, the trading of concerned issue is
suspended for 3 days.
LExceptions to trade suspension
In relation to the stock splits, capital reduction, spin-off, merger after
division and mergers between the listed companies, trading is not
suspended for 2 days, i.e., from 4 days to 2 days before the due date
of submission of stock certificates of the concerned companies, and in
case of ex-dividend and ex-rights, trading of concerned issue is not
suspended for 2 days, i.e., from 4 days to 2 days before the record
date.
KOREA
EXCHANGE
(1) Definition of program trading
(a) Common definition
Program trading generally refers to the computer-driven trading method.
That is, the routines such as the market analysis, identification of
investment opportunities and order placement are handled by the
computer.
The investment strategies are devised for a variety of market
conditions using the data compiled beforehand and the computer is
instructed to process the orders based on the market analysis made
according to such investment strategies.
(b) Definitions according to the KRX regulations
LIndex arbitrage trading
Simultaneously buying and selling a basket of KOSPI200 (KOSTAR)
constituent stocks and KOSPI200 (KOSTAR) futures or options for the
purpose of gaining profits by exploiting the price differences between
the basket of KOSPI200 (KOSTAR) constituent stocks and KOSPI200
(KOSTAR) futures and options contracts.
Buying a basket of constituent stocks after selling futures or options, or
vice versa.
There is no prerequisite that the trading time of a basket of constituent
stocks and the futures must be the same.
LNon-arbitrage trading
The same investor trading 15 or more of constituent stocks of KOSPI
(10 or more of constituent stocks of KOSTAR) at the same time.
* Before August 28, 2006, non-arbitrage trading was restricted to the constituent
stocks of KOSPI200.
(2) Need to regulate program trading
It is possible that program trading may make worse the market instability
because it is based on the technical and mechanical investment
strategies about the market movement. For instance, sudden price
fluctuation can result from a large amount of sell or buy orders placed at
the same time by the investors who anticipate the same or similar market
conditions, and the price of an individual share may be determined by
the market price trend, independent of the inherent value of the company.
F. Administration of program trading quotations
KRX
Furthermore, in case where the open positions of arbitrage trading is
accumulated until the last trading day of the futures & options
contracts, there is a risk of sudden price fluctuation on the last trading
day because of the trading to offset the large quantity of open positions.
Therefore, program trading needs to be regulated in order to alleviate
the sudden price fluctuation caused by the excessive program trading
and stabilize the investment sentiment.
(3) Control of program trading quotations
(a) Suspension of validity of program trading quotations (Sidecar)
LSummary
Sidecar is a system that temporary suspends the validity of program
trading quotations when the market conditions change rapidly, thus
lessening the impact of program trading on the market.
LCriteria for activating sidecar and its effects
Sidecar is activated when the price of base contract in the Futures
Market deviates 5% or more from the base price of the issue and such
situation last at least for 1 minute.
In case where the price rises, the validity of bid program quotation is
suspended for 5 minutes and in case where the price falls, the validity
of ask program quotation is suspended for 5 minutes.
LCriteria for deactivating Sidecar
When 5 minutes have elapsed since the suspension of validity of
program quotation.
During the last 40 minutes before the market closing time.
In case where circuit breakers was activated during the suspension of
validity of program quotation, when the concerned trading is resumed.
(b) Disclosure of program trading quotations
To make the program trading status transparent, all program
quotations are required to be indicated as such (including if it is for
arbitrage or non-arbitrage trading) at the time of placing quotations.
(Article 12 of the Enforcement Rules of the Stock Market Business
Regulation)
KOREA
EXCHANGE
(1) Definition
LGeneral definition
Short sale generally means selling the stocks not owned by the seller
or settling the trade with the borrowed stocks, not with the stocks
owned.
LDefinition according to regulation
The KRX regulation defines the short sale as the selling with the
intention of settling the trade with the borrowed stocks, including the case
where the timely delivery of the sold stocks after the trade is not certain.
(2) Objectives of regulating short sale
To secure the reliability of settlement and prevent the disruption in
market that may be caused in case of settlement default.
To contain the sharp decline of stock price caused by the intensive
speculative short sale in a sluggish market and minimize the market
impact thereafter.
(3) System of regulating short sale
(a) Article 188(1) of the Securities and Exchange Act
Although the Securities and Exchange Act does not regulate the short
selling by the retail investors, it prohibits the short selling by the
officers and employees of a listed company.
(b) Business Regulations of the KRX
LRestrictions on quotation
Short selling is prohibited except the following cases:
- Cases of selling the stocks deposited with another depository
institution or are owned by other means, and the delivery by the
settlement deadline has been confirmed by a confirmation letter, etc.
- Cases of selling the stocks borrowed for the margin trading or loan
transaction.
- Cases of selling the stocks, within the matching quantity, of which
purchase order has been executed on the market, before the
settlement day.
- Cases of selling the stocks before acquiring them after the exercise of
the rights of bonds linked to stocks, e.g., bonds with warrants, etc.
G. Regulating short sale
KRX
- Cases of selling ETFs to be delivered as a result of a request for the
issuance of new shares or additional creation units or selling of the
stocks to be delivered following ETF repurchase request, thus the
settlement is certain.
The securities companies are required to collect 100% of trading
amount as the good faith deposit for the next 3 months, in case of
receiving orders from a customer who violated the short sale
regulations and failed to settle the trade. However, the securities
companies may change the good faith deposit rate, in case where it is
judged that the infringement of the regulation is not intentional or the
customer has committed no major offense.
LRegulation of offer price
In case of the selling short that is intended to be settled with borrowed
stocks, in principle, it is prohibited to place a quotation of which the
offer price is lower than the most recent market price.
However, in case of short selling of ETFs, index arbitrage trading, stock
arbitrage trading and ETF arbitrage trading, the offer price is not
regulated.
(c) Other regulations relating to short sale
When receiving an short sale order and placing a quotation, the
concerned member company is required to indicate on the order slip
and quotation slip that the quotation is for short sale (Article 12 and
108 of the Enforcement Rules of the Stock Market Business Regulation;
Article 18 of the Enforcement Rules of the Kosdaq Market Business
Regulation). The securities companies may refuse to accept the
entrustment of order that infringes the regulations (Article 84 of the
Stock Market Business Regulation; Article 40 of the Kosdaq Market
Business Regulation).
Also, when it is necessary for the market management, the KRX may
request the securities companies to submit the information relevant to
short sale (quantity, price, date and customer name, etc.) (Article 17 of
the Stock Market Business Regulation; Article 9-2 of the Kosdaq
Market Business Regulation).
KOREA
EXCHANGE
(1) Method of determining the base price of initially listed shares, etc.
The base price of initially listed share is the first trading price
determined by the quotations, which are within the specified price
range, received during the quotation receiving hours (08:00 ~ 09:00).
The price range of quotations participating in the determination of first
trading price (base price) is from 90% (50% in case of preferred
shares) to 200% of appraisal price. However, in case where the net
asset value per share is the appraisal price, the quotation price range is
from 50% to 200% of appraisal price.
Once the base price is determined, the issue is traded in accordance
with the trading method used for other listed issues, within the upper
and lower price range determined on the basis of the base price.
Similarly, in cases of the relisting, capital reduction, initial listing of
preferred shares, the first trading price determined after receiving the
quotations, which are within specified price range based on the
appraisal price, is deemed the base price.
(2) Definition of appraisal price and reasons for establishment
LThe definition of appraisal price
Appraisal price is a price used as a base in setting the quotation price
range at the time of determining the first trading prices of initially listed
shares, etc., which is established to prevent the price distortion caused
by the participation of quotations with abnormal prices.
LReasons for establishing appraisal price
Appraisal price is established because of the need to prevent the
market disturbance that may result when the first trading price
deviates significantly from the acceptable price due to the participation of
abnormal quotations.
Thus, use of the apprai sal pri ce i s necessary to prevent the
participation of the quotations with abnormal prices, which may
undermine the establishment of fair price and negotiability of the
share, in the determination of the first trading price.
4. Exceptions to Trading Methods
A. Determination method for the first trading price of initially listed issue, etc.
KRX
(3) Criteria for determination of appraisal price
If a concerned issue has already been appraised by the investors (e.g.,
the public offering price, the closing price in the Kosdaq Market), such
issuing price or the closing price is the appraisal price, and when the
issuing company underwent a structural change (e.g., spin-off,
merger), the theoretical price is the appraisal price. In case where
there is no objective appraisal standard, the net asset value per share is
used as the appraisal price of the concerned issue.
(1) Summary of regulations relating to acquisition of treasury stocks
LDefinition
Treasury stock means the stock reacquired and held by the issuing
company. Although the Commercial Act permits the acquisition of
treasury stocks only in an exceptional case, the Securities and
Exchange Act generally allows the acquisition of treasury stocks by the
listed companies.
LObjectives of purchasing treasury stocks
Through the purchase of treasury stocks, the listed companies can
improve the supply and demand condition and create the expectation
for higher dividend, and by reducing the negotiable shares, it is
possible to stabilize the stock price.
Also, the treasury stocks are acquired to defend against a hostile
takeover, or to award the employees or grant the stock options.
LLegal purchasing limits
The Commercial Act prohibits the purchase of treasury stocks, except
for the purpose of stock retirement, merger, transfer of business,
exercise of right, handling of fractional shares, and execution of stock
repurchase claim (Article 341).
However, the Securities and Exchange Act eases the restriction by not
stipulating the reasons for purchase. Nonetheless, the Act regulates
the source of purchase funds and purchase method since the acquisition
of treasury stocks can damage the capital adequacy. (Article 189-2)
B. System of trading treasury stocks
KOREA
EXCHANGE
(2) Regulations on treasury stock purchasing
Principles Applied to Treasury Stock Purchase
- To prevent purchase of treasury stocks from a special person outside
the KRX market, while ensuring the participation of retail investors
through the KRX market or tender offer.
- To preclude the acquisition of treasury stocks by the ineligible
company through the strict control of financial resources used for
acquisition.
- To make the acquisition procedures transparent by requiring to
observe the established procedures, including the submission of report
on the acquisition of treasury stocks (tender offer) and disclosure of such
report.
LLimitation on purchasing quantity
Currentl y, there i s no l i mi t on the purchasi ng quanti ty, i . e. ,
theoretically, a listed company can purchase all negotiable shares,
provided that it has sufficient funds to do so.
LPurchasing fund (Article 116 of the Regulation on Securities Issuance and
Disclosure of the FSC)
The amount that can be used for the purchase of treasury stocks is
calculated by adding/subtracting the aggregated acquisition/disposal
amount (including the treasury stock trust contracts entered into or
terminated) since the end of previous fiscal year and the profit
dividend amount determined at the general shareholders'meeting
to/from the maximum dividend amount according to the Commercial
Act, that is stated in the financial statement at the end of the previous
fiscal year.
In case of purchasing treasury stock for profit retirements, the amount
is calculated by subtracting the revaluation reserve, corporate development
reserve, corporate rationalization reserve, corporate structure improvement
reserve, and the contract amount, if any treasury stock trust contracts exits,
from the profit available for dividend according to the Commercial Act,
which is stated in the balance sheet at the end of the concerned fiscal year.
LPurchasing method (Article 189-2 of the Securities and Exchange Act)
Treasury stocks can be purchased in the KRX Markets or through
over-the-counter market by way of the tender offers.
In addition, indirect acquisition by way of the treasury stock trust
contract is possible.
KRX
LPurchasing (Disposal) procedures (Article 84-3 of the Enforcement Decree
of the Securities and Exchange Act)
When intending to purchase (dispose) the treasury stocks, the
concerned company is required to submit a report on acquisition
(disposal) of treasury stocks to the FSC and the KRX, and the purchase
(disposal) period is for 3 months counting from the 3 days (1 day)
after submission of the report on acquisition (disposal).
- When intending to dispose the treasury stocks using two or more
regular session and off-hours block trading methods, it is required to
state the quantity and type of stocks to be disposed by each method
in the report on disposal. (Article 114(1) of the Regulation on
Securities Issuance and Disclosure)
(3) Treasury stock trading method
(a) Reasons for regulating the trading method
In case of trading the treasury stocks in the KRX Market, it is difficult to
entirely eliminate all possibilities of market impacts such as the sudden
price fluctuation and unfair trading such as the use of inside
information. Therefore, to avert the possibility of being used as a
means of price manipulation or insider trading, the method of trading
the treasury stocks is strictly regulated.
(b) Treasury stock trading method
LOpening a treasury stock trading account
In order to trade the treasury stocks, the listed companies are required
to open a separate account for trading treasury stocks with a securities
company.
No other issues, except the treasury stocks, can be traded through the
account for treasury stocks trading.
LTrading procedures
The member securities companies are required to submit to the KRX
the report on trading of treasury stocks within 1 hour after the market
closing on the day before the purchase.
New quotations may be placed during the trading hours (introduced
on December 1, 2003), but no new quotation and correction quotations
can be placed during the last 30 minutes before the market closing time.
KOREA
EXCHANGE
Maximum order quantity per day is, within 1% of total number of
stocks issued, the higher quantity between 10 % of the acquisition
(disposal) quantity reported and 25% of average daily trading volume
during the most recent 1 month.
LTrading of treasury stock by way of trust contracts
The trading of treasury stocks by entering into a trust contract was not
regulated in the past, but since December 1, 2003, it is regulated in
the same way as the direct purchase (disposal) by a listed company.
However, considering the nature of the trust contract, the daily
quantity limit is set to 1% of the total number of shares issued.
Also, to prevent the frequent acquisition (disposal) of treasury stocks
using trust contracts, the disposal (acquisition) within 1 month of
acquisition (disposal) [on the basis of the most recent acquisition
(disposal)] is prohibited.
Price range
Quotation
receiving hours
Bid Ask
Pre-hours
quotations
Regular-session
quotations
- Price between the
previous day's closing
price and the price that
is 5% higher than that
closing price
- Price between the previous
day's closing price and
the price that is 2
quotation price units lower
than that closing price
- Upper limit : The higher
price of the day's highest
price or highest bid price
- Lower limit : The price
that is 10 quotation
price units lower than the
higher price between the
most recent market price
and the highest bid price
- Price between the lower
price out of the most recent
market price and the
lowest offer price, and the
price that is 10 quotation
price units higher than
such lower price
KRX
(c) Trading of treasury stocks using off-hours block trading.
In case of disposing the treasury stocks using the off-hours block
trading method, the price range was strictly regulated between the
closing price and the price at 2 quotation price units lower than the
closing price. However, to facilitate efficient disposal of the treasury
stocks, this regulation was revised on October 30, 2006, allowing j
5% of the closing price of the day (in case of the pre-hours block
trading, the closing price of the previous day).
The treasury stocks can be purchased using the off-hours block
trading method only in the case of acquiring the treasury stocks from
the government or in the case where the government has advised and
the FSC has permitted the acquisition.
- Purchasing price range is the same as the one applied to other off-
hours block trading. However, in case of acquisition from the
government or the Korea Deposit Insurance Corporation or
acquisition according to the approval of the FSC, no price restriction
(including the price limit) is applied.
Unlike trading during the regular session, the daily quantity limit is not
applied, but the submission of the report on acquisition (disposal) of
treasury stocks is required by the day before the trading.
(d) Exceptions in acquisition of treasury stock
In case of sudden change in the market condition, to protect the
investors and stabilize the market, the KRX may make an exception in
allowing the trading of treasury stocks after obtaining the permission
from the FSC.
When exception was made, the trading of treasury stocks is possible
up to the daily quantity limit that is within the acquisition quantity
reported.
* Period when the exception was applied: September 21, 2001 ~ March 29, 2002
(1) Definition
In response to the growing demand for the block trading in the
regular session, the regular session block trading was introduced. The
5. Satisfying the Special Trading Demand
A. Regular session block trading (basket trading)
KOREA
EXCHANGE
system intends to improve the quality of market through the reliable
market operation by preventing the sudden price fluctuation. It also enhances
the convenience of investors by expanding the block trading hours.
Regular-session block and basket trading are the trading methods, in
which the KRX executes the quotation placed by a member securities
company against an order or a coupled order for an individual share
or basket of stocks, that meets certain criteria. The Stock Market has
introduced the regular session block trading and regular session basket
trading, and the Kosdaq Market has introduced the regular session
block trading. The K-BloX'system is used for the order placement
and trade execution. Although the identification of counter party and
negotiation of trading conditions are normally done outside the KRX
market, the K-BloX'can be used for those purposes.
(2) Trading method
Details
Issues eligible for
trading
- Stocks, DRs, ETFs
(excluding the issues that has no trading record in
the regular session)
Trading Time - Regular session (09:00 ~ 15:00)
Price Range
- Within the highest and lowest market price of the
day, which is established before the quotation
placement
Order Types
- Coupled order for which the details of bid and ask
match up Order Quantity
Order Quantity
- Block trading :
Stock Market : Order quantity at least 500 times of
trading unit or the trading amount of KRW 100
million or more
Kosdaq Market : Trading amount of KRW 100
million or more
- Basket trading : A basket of 5 stocks or more, with
the trading amount of KRW 1 billion or more
Execution Price - At the price negotiated between the buyer and seller
Change, Cancellation
- Change or cancellation of quotation is possible
before the execution
Trade Unit - 1share
Number of Members
- Either buying or selling party has to be a single
member
KRX
(1) Off-hours trading
LDefinition
Off-hours trading refers to the method of executing a trade among
the quotations received during a fixed period after closing or before
opening the regular session. The off-hours trading is classified into the
off-hours closing price trading, off-hours block trading and off-hours
basket trading and off-hours single price auction trading.
To provide a trading opportunity to the investors who missed the
trading opportunity during the regular session, trading sessions are
opened before or after the regular session. Off-hours trading also
provides the trading opportunity to the orders that are difficult to
execute by way of the auction method. The securities eligible for off-
hours trading are stocks, DRs and ETFs.
LOff-hours trading
B. Off-hours trading System
Trading
Hours
Quotation
Receiving
Hours
Trading Types
Pre-hours
Session
07:30~08:30 07:30~08:30
Off-hours closing price trading;
Off-hours block trading;
Off-hours basket trading
After-hours
Session
15:10~15:30 15:00~15:30
15:30~18:00 15:30~18:00
15:10~18:00 15:00~18:00
Off-hours closing price trading
Off-hours single price auction
trading
Off-hours block trading;
Off-hours basket trading
Off-hours basket trading is not yet introduced in the Kosdaq Market.
KOREA
EXCHANGE
(2) Off-hours closing price trading
LDefinition
It refers to the method that executes the orders that are received
during a fixed period after the closing of the regular session at the
closing price of the day.
* During the pre-hours session, the orders are executed at the closing price of
the previous day.
This method is introduced mainly to accommodate the investors who
wish to execute the orders that were not executed during the regular
session.
LTrading method
(3) Off-hours single price auction trading
LDefinition
Off-hours single price auction trading is the method of executing trade
by means of the single price auction at every 30-minute intervals after
the closing of the regular session. It was introduced on May 30, 2005
to reinstate the functions of the ECN, when the ECN closed down its
operation.
Details
Issues eligible for
trading
- All listed securities
(excluding those have no record of execution in the
regular session)
Execution Price
- The closing price of the day (in case of pre-hours
trading, the previous day's closing price)
Execution method
- Bid and ask quotations are matched according to
the time priority
Trading Unit - 1share
KRX
LTrading method
(4) Off-hours block and basket trading
LDefinition
Off-hours block or bask trading refers to the method of executing the
coupled orders with a large quantity, which are submitted for an
individual issue or basket of stocks, during the off-hours trading session.
Off-hours bl ock tradi ng was i ntroduced to compl ement the
shortcomings of the reported block trading system that can be
executed only at the opening or closing price, and it is intended to
assist the institutional investors who trade many stocks in a large
quantity for the management and creation of investment portfolios.
LTrading method
Details
Issues eligible for
trading
- All listed issues
(excluding those that do not have a record of trade
execution during the regular session)
Execution Price
- Price that is within j5% of the closing price of the
day, which must be within the price limit of the day
Price Matching Method
- Single price auction at every 30-minute interval
from 15:30 to 18:00 (total of 5 times)
Trading Unit - 1share
Details
Issues eligible for
trading
- All listed issues (excluding those have no trading
record during the regular session)
Price Range - Within the price change limits of the day
Order Types - Coupled order with the matching details
Order Quantity
- Off-hours block trading
Stock Market : Order quantity at least 500 times of
trading unit or order amount at least KRW 100 million
Kosdaq Market : Order amount at least KRW 100 million
- Off-hours basket trading: A basket of 5 stocks or
more with trading amount of KRW 1 billion or more
Execution Price - At the price negotiated by both parties
Trading Unit
Number of Members
- 1share
- Either the buying or selling party is a single member
KOREA
EXCHANGE
(1) Definition
L Liquidity Provider system is the system where the securities company,
which entered into a liquidity provision agreement with the issuer of
security with poor liquidity, continuously places bid and ask quotes to
facilitate the establishment of a stable price.
Under the liquidity provision agreement, the LP is obliged to place bid
and ask quotes, but is compensated for the service and receives
commission from the listed company with whom the agreement is
entered.
In case where the spread between the bid and ask quotes is higher
than certain ratio, the LP places quotations that are aimed to reduce
the spread and responds to the orders placed by investors.
' Currently, the LP services are available for the stocks, ETFs and ELWs in the
Stock Market and ETFs in the Kosdaq Market.
(2) Expected effects
LStimulation of order placing with the increase in trading volume (liquidity
providing quotations)
Possible breakaway from the vicious circle of low liquidity', which are
caused by investors avoiding the issues with low liquidity.
LProvision of a comprehensive financial service by LP
The LP can provide the services such as the business analysis and
research, support for the IR and public relations, leading the corporate
financing (e.g., paid-in capital increase), etc.
6. Liquidity Provider System
A. Liquidity Provider (LP)
KRX
LQualifications of LP
Clearing members with a license for self-account transaction.
Appointment of employee who is responsible for the tasks concerning
the liquidity provision.
In case where a LP has received the lowest grade for 3 consecutive
times in the LP performance assessment, at least 1 year has been
elapsed since receiving the result of the most recent assessment.
LObligation of LP
Bid and ask spread : If the spread between the best bid and best ask
quotations is more than 3%*, both the bid and ask quotes must be
submitted within 5 minutes of such occurrence, so that the spread
would be reduced.
* The LP and the listed company decide the spread ratio, but it should
be less than 3%.
Minimum quotation quantity : 5 times of trading unit.
* The LPs and the listed company decide the amount, but it should be at least 5
times the trading unit.
Exemption from submitting liquidity providing quotations
In case where the spread between the best bid and the best ask
quotations is less than 3%.
During the quotation receiving hours for single price auction and
during 5 minutes immediately after closing of the concerned single
price auction.
In case where LP's holding amount dropped below the quotation unit.
In case where LP's trading volume has exceeded a fixed amount
(specified in the agreement).
[ In case where the KRX deems the exemption is necessary for the
market management.
LQuotation submission method by LP
When the situation requiring the submission of liquidity providing
quotation occurs, the LP first places either bid or ask quotation, and
then places the other side quotation.
- The price of quotation placed first must be between the bid and ask
quotations (it is possible to place the ask quote at the best ask price
and bid quote at the best bid price); and
B. Details of LP system
KOREA
EXCHANGE
- The price of quotation submitted later must be within j3% of the price
of quotation submitted first.
If ask quotation was submitted first
Ask
Price
Bid
(KRW)
Ask
Price
Bid
(KRW)
'Best ask quotation is KRW 10,400
and best bid quotation is KRW 10,000,
thus the spread ratio exceeds 3% and
the LP is obliged to place quotations.
'The LP can place an ask quote at the
price between the best ask price (KRW
10,400) and the best bid price plus 1
quotation unit (KRW 10,050).

(LP) 50
100
100
100 100
'If the LP has placed an ask quote at
KRW 10,200 first, it may place a bid
quote at the price between the best
ask pri ce mi nus 1 quotati on uni t
(KRW 10,150) and the price that is 3%
below the best ask price (KRW 9,900).
Ask
Quotation
Range
Bid
Quotation
Range
10,450
10,400
10,350
10,300
10,250
10,200
10,150
10,100
10,050
10,000
9,900
10,450
10,400
10,350
10,300
10,250
10,200
10,150
10,100
10,050
10,000
9,900
KRX
If bid quotation was submitted first
Thus, the liquidity providing quotations cannot be matched with the
quotations that were received beforehand, and are matched only with
the quotations received later than the liquidity providing quotations.
10,450
10,400
10,350
10,300
10,250
10,200
10,150
10,100
10,050
10,000
9,900
'Best ask quotation is KRW 10,400 and
best bid quotation is KRW 10,000,
thus the spread ratio exceeds 3% and
the LP is required to place liquidity
providing quotations.
'The LP can place an bid quote at the
price that is between the best bid price
(KRW 10,000) and the best ask price
minus 1 quotation unit (KRW 10,350).
'If a bi d quote at KRW 10, 050 i s
submitted first, the LP may place an ask
quote at the price between the best bid
pri ce pl us 1 quotati on uni t (KRW
10,100) and the price that is 3% higher
than the best bid price (KRW 10,350).
Ask
Price
Bid
(KRW)
Ask
Price
Bid
(KRW)

100
100
100 100
Bid Quotation
Range
Ask Quotation
Range
(LP) 50
10,450
10,400
10,350
10,300
10,250
10,200
10,150
10,100
10,050
10,000
9,900
KOREA
EXCHANGE
LSupervision and management
Liquidity providing quotations can be submitted only through the
special account that the securities company established for that
purpose, and the regular monitoring is carried out to insure the fair
trading practice and the compliance with the obligations of LP.
LAssessment of LP performance
Performance of LPs is assessed every quarter, while examining such
aspects as the degree of compliance with the LP's obligations, the
amount of contribution made in improving the quotation spread, the
keenness in submitting the liquidity providing quotations, etc.,
If a LP receives the lowest grade for the 3 consecutive quarters, such
LP is banned to become a LP for a period of one year.
LReporting requirements
When entering into a new liquidity provision agreement or changing
the important details of the existing agreement, the concerned LP is
required to notify such fact and details to the KRX within 3 business
days.
The fact about the appointment or change of the staff responsible for
liquidity provision or other information required for the assessment of
LP performance should also be reported.
KRX
Korea Exchange
1. Definition of Clearing and Settlement
A. Definitions
L General meaning of settlement is the termination of trading contract by
the seller fulfilling the obligation of transferring the ownership rights of
sold securities and the buyer fulfilling the obligation of making the
purchase payment.
LCharacteristics of settlement in a securities market
In a securities market, the securities change hands anonymously, in
groups, in bulk and repeatedly. If trades are settled using general
settlement method, the market participants have to raise a large
amount of cash and stocks for the settlement and have to pay
enormous amount of f ees f or t he set t l ement operat i ons.
Consequently, it can create a doubt about the secure and reliable
settlement. Furthermore, in case of a settlement failure, it is difficult to
bring a series of multilateral trades to a conclusion.
Hence, a highly coordinated and standardized settlement and risk
management methods are required to facilitate timely and speedy
settlement, which is the fundamental requirement of a securities
market, and as the market operator, the exchanges establish and
operate the clearing and settlement system, including the system of
handling the default.
L Clearing is a series of processes that a Central CounterParty (CCP), that
assumes the accountability of buyer to all sellers and the accountability of
seller to all buyers, performs to guarantee the settlement by netting the
credits and liabilities between the sellers and the buyers (between the
member securities companies and the CCP) and to instructing the
settlement agency to settle.
Accordingly, if a member company fails to settle a trade, the CCP
discharges the settlement obligations in accordance with the laws and
regulations (announcement of default, action against the failed member,
injection of funds for settlement, taking the responsibility for final
settlement).
B. Clearing
KOREA
EXCHANGE
Broad sense of settlement = Broad sense of clearing
Clearing function (narrow definition) Settlement function (narrow definition)
- To reciprocate the trade (novation,
acceptance of liability, open offer)
- To receive the trading details
- To perform the function of validating
the trading details
- To take the custody of good faith
deposits and substitute securities
- To transmit the settlement instruction
LThe KRX as the CCP
The Securities and Exchange Act contains the provisions that allow the
KRX to effectively perform the functions of CCP. For instance, it states
that the KRX stipulates the settlement methods in its business
regulations (Article 95); the member securities companies contribute to
the Joint Compensation Fund (Article 96); the KRX may appropriate
members'deposits and guarantee funds for the settlement of the
liabilities of members (Article 97); and the KRX has a right to be paid
in preference to any other creditors with respect to the money or
securities paid for the settlement (Article 99).
The ground to assume the credits and liabilities of member companies
that were incurred from the trading in the KRX Markets is stipulated in
the KRX's Membership Regulation (Article 21), the Stock Market
Business Regulation (Article 73) and the KOSDAQ Market Business
Regulation (Article 29).
LSettlement refers to the termination of trade as a result of the CCP and
the member companies fulfilling the credits and liabilities obligations that
are determined by the clearing processes.
Definition of Clearing and Settlement
69 IV. Clearing and Settlement System
C. Settlement
- To deliver the settlement securities
- To pay the settlement cash
KRX
LSettlement'and settlement process'
As the settlement means the fulfillment of credit and liability
obligations, the settling parties'are the CCP and the member
securities companies.
However, the fulfillment of obligations among the trading parties is
carried out through the depository institutions (for book-entry transfer
of securities) and banks (for wire transfer of cash payment), thus the
actual settlement process is carried out through the depository
institutions and banks.
Clearing and Settlement Procedures in the KRX Markets
KOREA
EXCHANGE
Trade matching
Trading details are verified by the trading parties after the execution of
trades. In addition, the KRX trading system checks the trading details
at the time when the trade is executed (Locked-in Trade).
Currently, the KRX notifies the trading details to the concerned
member companies in real time.
Correction of trading errors and confirmation of member position
In case where the KRX made an error in the course of executing trade
or an error occurred in the course of placing a quotation by a member
company, the KRX corrects such error.
To correct an error made by the member companies, the concerned
company must notify the KRX soon after the error was made, and the
position (net credits and net liabilities) of the member is determined
after the KRX corrected the errors reported.
Assumption of liabilities
The settlement is carried by way of the KRX assuming the liabilities of
a clearing member resulted from the trading in its Markets, and in
turn, the concerned clearing member assumes the same liability that
the KRX has assumed.
The clearing member, in accordance with the settlement entrustment
agreement entered i nto pursuant to the KRX's Membershi p
Regulation (Article 22), assumes the rights and obligations of non-
clearing member with regard to the settlement of the trades, and at the
same time, the non-clearing member assumes for the clearing member
the same rights and obligations that the clearing member has assumed.
Determination of the settlement securities and settlement payment by netting
The amount of securities to be delivered is determined by netting the
selling quantity and buying quantity per issue per member company,
and the payment amount is determined by netting the selling amount
and buying amount per member.
2. Clearing System of KRX
A. Clearing under normal situation
KRX
It should be noted that the amount of settlement payment is
determined by netting the total sales amount and total purchase
amount of a concerned clearing member in the Stock Market and the
Kosdaq Market.
[Notification of settlement details and instruction
When the amounts of settlement securities and settlement payment
are determined, the KRX notifies such details to the clearing members
and the Korea Securities Depository.
The clearing members are required to make the payment of cash and
delivery of the settlement securities by the settlement deadline (16:00),
and the KRX transfers the cash and delivers the securities to the
concerned clearing members after the settlement deadline.
Under the authorization of the KRX, the Korea Securities Depository
carries out the settlement operation, i.e., the book-entry transfer of the
delivered securities and cash payment.
[ Confirmation of fulfillment of settlements
The settlement is completed when the settlement payments have been
entered in the account of the net selling member and the settlement
securities have been entered in the account of net buying member.
The Korea Securities Depository shall report the status of settlement
to the KRX, when the settlement is completed.
Declaration of default
In case where a clearing member has failed to settle the trades or
there is a possibility of not settling the trades by the settlement
deadline, the KRX may suspend the concerned clearing member from
trading for a fixed period and hold back all or a part of the sales
amount and purchased securities due to that concerned clearing
member.
Termination of trade, consolidation of unsettled trades, and close-out netting
The KRX is required to bring to a conclusion all trades conducted by a
member company who has been suspended from trading or lost its
trading privilege.
B. Clearing in case of settlement default
KOREA
EXCHANGE
In case of defaulting on the settlement of Repo trade, the KRX treats all
trades with a same counterparty as a single agreement, and substitutes
the settlement with a single payment to the counterparty of the
defaulted party, of the amount equivalent to the total repurchase price,
the purchased bonds and the variation margins, which must be paid
and returned by the defaulted party, after the settlement deadline on
the repurchase date (Close-out Netting).
Discharge of unsettled obligations of the defaulted member
In case where a clearing member defaulted on the obligations arising
from the securities trading in the KRX Markets, the cash and securities
such as the member's deposit, guarantee fund and contribution to the
Joint Compensation Fund, which the defaulting clearing member
deposited with the KRX, are appropriated to compensate the damages
caused.
In case where the deposit of the defaulting member is insufficient to
compensate the damage caused by the default, the KRX appropriates
the contributions of other members to the Joint Compensation Fund.
In this case, the amount borne by other clearing members is
proportional to the amount each member contributed.
If the Joint Compensation Fund is not enough to cover all damages,
the KRX uses its own assets such as the settlement reserve.
Exercise of the right of indemnity against the member who defaulted on
settlement
The KRX is liable to compensate for the loss caused by the defaulting
member companies.
In case where the KRX has compensated the damage caused by the
member company's default, the KRX has a right of indemnity over the
amount compensated and the expenses i ncurred agai nst the
defaulting member company.
With regard to the cash and securities paid for the settlement, the KRX
has a right to be preferentially treated over other creditors.
[ Reporting to the FSC
When the KRX has compensated the damages caused by the member
company's default, the KRX is required to report such facts to
the FSC.
KRX
LThe delivery of settlement securities is carried out through the book-entry
transfer system that is operated by the Korea Securities Depository,
without the physical delivery between the KRX and the member
securities companies.
LPayment of settlement amount is carried out through the book-entry
transfer system that is operated by the Bank of Korea and other
commercial banks*.
'Currently, the settlement bank for the government bond market is the Bank of
Korea and the settlement banks of other markets are the commercial banks such
as the Shinhan Bank and Woori Bank.
L Under the authorization of the KRX, the Korea Securities Depository
operates the book entry transfer system for the delivery of settlement
securities and receipt of settlement payment.
Thus, the Korea Securities Depository reports to the KRX the
settlement status.
LThe KRX is liable to compensate any damage caused due to the default
by the member securities companies. To compensate the damage caused,
the KRX first appropriates the Joint Compensation Fund, and if the Joint
Compensation Fund is not sufficient to cover the damage, the KRX uses
its own assets.
3. Settlement System of KRX
A. Book-entry transfer of settlement securities
B. Book-entry transfer of settlement payment
C. Reporting the results of settlements
4. Management of Settlement Risks
A. Settlement obligation of KRX
KOREA
EXCHANGE
LAccumulation and Management of Joint Compensation Fund.
Joint Compensation Fund is a reserve fund, to which the clearing
member companies contribute, accumulated to compensate the
damages resulted from the defaulting the trade contract by a clearing
member. Within the limit of the fund, the clearing members are
jointly liable for the damages caused by the default.
Joint Compensation Fund is accumulated up to KRW 100 billion, for
each of the cash and derivatives market, and the funds for cash market
and derivatives market are managed separately. Furthermore, the
Joint Compensation Fund is managed separately from the KRX's own
assets and invested in the safe assets such as the treasury bonds.
Amount that each member contributes to the Joint Compensation
Fund has 2 components, i.e., the basic contribution and the intermittent
contribution calculated on the basis of the trading value of the concerned
member. The contribution amount per member is calculated each
quarter and the members are required to make up (or refunded) the
difference from the contribution already made within 20 days from the
beginning of each quarter.
L Settlement Reserve (Article 54 of the KRX's Article of Incorporation)
To secure the fund necessary for the fulfillment of settlement
obligation, the KRX sets aside a part of its asset as the settlement
reserve (at the present, KRW 100 billion).
LElimination of claims and liabilities before the netting.
Numerous claim-liability relationships between the KRX (CCP) and a
clearing member are transformed to a single claim-liability relationship
per payment amount and issue after netting.
LReduction of settlement amount by netting
After netting, the amount that the market participants have to pay and
collect shrinks more than 90% from the original trading amount.
B. Settlement guarantee system (Joint Compensation Fund)
C. Reduction of settlement risk by netting
KRX
KOREA
EXCHANGE
According to the BIS(Bank for International Settlement), the DVP is a
mechanism which links a system for transferring funds (payment) to a
system for transferring the securities (delivery) in a way that ensures
that payment occurs if and only if delivery occurs.
There are three types of DVP system, i.e., model 1 (gross securities vs.
gross funds), model 2 (gross securities vs. net funds), and model 3
(net securities vs. net funds).
The KRX has adopted the model 3, thus transferring the settlement
securities and payment amount determined by netting through the
KRX accounts, and the risk that could arise due to the time difference in
the book-entry transfers of payment and securities is reduced through
the use of the CCP system (assumption of liability, accumulation of Joint
Compensation Fund, discharge of settlement obligation, etc.)
L When a clearing member commences the bankrupt or rehabilitation
procedures, the clearing and settlement system of the KRX is protected
under the Debtor Rehabilitation and Bankruptcy Act", thus ensuring the
settlement completion. Protection of clearing system (netting system):
When a market participant commences the bankruptcy or rehabilitation
procedures, the effects take place in accordance with the decisions of the
operator of the clearing and settlement system (i.e., the KRX), and the
clearing and settlement procedure is not subject to the cancellation,
termination, abrogation and negation.
Guarantee of settlement completion: In case where the institutions
participating in the payment and settlement system, which are
designated by the Bank of Korea, are required to commence the
bankruptcy and rehabilitation procedures, the effects take place in
accordance with the decisions of the operator of the payment and
settlement system.
D. Realization of DVP (Delivery Versus Payment) through the CCP
E. Risk management in case of the bankruptcy/rehabilitation of clearing member
KRX
33, Yoido-dong, Youngdeungpo-gu, Seoul 150-977, Korea
Tel : 82-2-3774-9000
Fax : 82-2-769-1028
E-mail : hjlee67@krx.co,kr
http://www.krx.co.kr

Introduction To Securities Trading in KRX

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Introduction To Securities Trading in KRX

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KOREA

E. Designation as abnormally rising issues

Release from designation of Abnormally

Release from designation of Abnormally

3) is lower than that on the

LExceptions to trade suspension and trade resumption

Price elevation (%) = 100

Price elevation 75%

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