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/Financial Services Commission

Financial authorities are completely overhauling the liquidity regulatory framework for securities firms to strengthen their liquidity risk management. The liquidity ratio regulation, which previously applied only to comprehensive financial investment business providers and issuers of equity-linked securities (ELS/DLS), will be expanded to all securities firms. Furthermore, a 'New Adjusted Liquidity Ratio' will be introduced to better reflect actual cash-convertibility during market crises.

According to the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) on May 18, an amendment to the Regulations on Financial Investment Business and its detailed enforcement rules has been prepared. The amendment will enter the prior notice period on May 21 and is scheduled to take effect in January 2027.

This overhaul stems from the awareness of issues raised during the 2022 Legoland crisis, when short-term money markets froze but securities firms' liquidity ratios on paper still remained above 100%. At the time, actual market conditions triggered a liquidity crisis as the refinancing of asset-backed commercial paper (ABCP) was blocked, leading to criticism that current regulations fail to accurately reflect crisis response capabilities.

First, the financial authorities decided to expand the liquidity ratio regulation, currently applied to only a subset of firms, to all 49 securities firms. Up until now, only comprehensive financial investment business providers and equity-linked securities issuers were required to maintain 1-month and 3-month liquidity ratios above 100%, but small and medium-sized securities firms will face the same requirements moving forward.

The core of the reform is the introduction of the 'New Adjusted Liquidity Ratio.' Financial authorities plan to apply a 'haircut' to liquid assets, reflecting the risk of price drops during market shocks. Accordingly, a 7% haircut will apply to AA-rated bonds, 10% to bonds rated A or lower, up to 15% to stocks and ETFs, and 30% to synthetic ETFs.

In addition, liquid liabilities will now include contingent liabilities such as debt guarantees, which were previously excluded. In particular, refinanced securities will be factored into liquid liabilities by up to 60% depending on the firm's credit rating, and loan or equity commitment agreements will be fully included under liquid liabilities.

Along with this, differential regulations will apply to secured transactions, such as repo (RP) sales and securities lending, based on the risk level of the collateral assets. The approach aims to reduce the regulatory burden on high-quality collateral like government bonds, while applying high outflow rates to lower-quality collateral to more realistically reflect potential liquidity outflows during a crisis.

The financial authorities are also pushing to tighten risk weights on real estate investments by securities firms and establish total investment limits. Furthermore, they are reviewing the introduction of a capital regulation framework for comprehensive financial investment business providers that is distinct from general securities firms, given their growing systemic importance.