The Future of the Korea Exchange: Q&A With CEO Sohn Byungdoo

How would you describe your vision and goals as the CEO of Korea Exchange?

As CEO of Korea Exchange (KRX), my vision is to elevate our exchange into a globally recognised, trustworthy, and efficient market, embodying our four strategic missions - Premium Market, Dynamic Market, Reliable Market, and Efficient Market.

Starting with creating a Premium Market, we intend to address the persistent undervaluation of the Korean Stock Market. Our strategy includes adjusting our practices to be in line with international norms through changes in dividend payment processes, mandating English-language corporate disclosures, and simplifying the process for foreign investors. Furthermore, we'll be adopting the ESG management ecosystem to uphold transparency and sustainability in our operations. The development of our latest IT system, EXTURE 3.0, is a significant leap towards amplifying our global competitiveness and recognition.

With the Dynamic Market mission, we aim to shift the paradigm of the capital market. This involves strengthening our trading rules and infrastructure to address ATS competition, encouraging innovation by supporting the KOSDAQ Global Segment, and championing investor inclusivity. Our dream is to create a flourishing capital market supported by a solid system for investor protection.

For our Reliable Market mission, our dedication lies in ensuring market fairness. This encompasses strict actions against unjust trading practices, enhancing the price discovery mechanism, and implementing a rigorous delisting review process. We also plan to intensify the risk management role of the Central Counterparty (CCP) and amplify the global uniformity of our transaction reporting system.

Lastly, within our Efficient Market mission, we aim to foster smart work innovation. Our plans include launching initiatives like K-Paperless and K-Works to boost operational efficiency. Moreover, we aim to improve our ability to manage markets through potential risk surveillance and crisis response training.

In essence, our ambition at KRX is to nurture a capital market that is internationally competitive, transparent, inclusive, fair, and innovative, while maintaining operational efficiency and sustainability.

How do you see ESG considerations affecting market dynamics in the future?

The role of Environmental, Social, and Governance (ESG) factors in guiding market directions is undeniable, most notably in the realm of climate-related disclosures. This accountability for a company's environmental footprint, beyond being ethically essential, brings significant financial implications, influencing investor conduct.

KRX is a leading proponent of comprehensive climate disclosures, enhancing market transparency and enabling well-informed investment choices. The Financial Services Commission (FSC) started strategies in 2021 to promote ESG-oriented investment. A systematic plan for compulsory ESG disclosures was developed, expecting KOSPI-listed companies with assets over two trillion Korean won to comply by 2025, expanding to all KOSPI firms by 2030. Alongside this, KRX introduced new ESG disclosure guidelines, and the Korea Corporation Governance Service (KCGS) revised its ESG Best Practice Guideline.

Simultaneously, global exchanges show a renewed commitment to net-zero emissions targets. As part of these efforts, we are establishing carbon credit trading systems, assisting industries in offsetting emissions and speeding up the global transition to a low-carbon economy. The KRX-managed Korea Emission Trading Scheme (K-ETS), introduced in 2015, made Korea the second Asian country with a cap-and-trade system. We are also considering a derivatives market for carbon credits to meet the government's 2050 carbon neutrality goal, which could stabilise price volatility and boost liquidity.

Another notable trend is the burgeoning ESG data business. Investors increasingly require solid, detailed ESG metrics, and we, as an exchange, can support this demand by imposing standardised ESG reporting for our listed firms. This will enhance ESG data access, market transparency, and efficiency. In case of Korea, the FSC and KRX launched an ESG information platform, providing accessible ESG data on listed companies, predicted to become a vital ESG data hub.

In summary, ESG elements bring substantial changes to market operations, creating a more sustainable, transparent financial landscape. As an exchange, we are committed to leading this transformation, merging economic viability with social responsibility and environmental stewardship.

How is Korea Exchange embracing technological advancement to improve market efficiency and accessibility?

-- What potential do you see for STO to transform legacy capital market?

As KRX’s CEO, I am proud to affirm our ongoing dedication to technological advancements in strengthening market efficiency and accessibility.

Our recently launched next-generation market system, EXTURE 3.0, embodies this commitment. Based on years of preparation, including our Informatization Strategy Plan, we've achieved a 30% increase in transaction processing speed and improved system capacity, covering areas such as daily processing capacity, order bandwidth, and communication lines between exchanges and member firms. Our incorporation of high-speed processing technology aims to optimise the entire market system, not just order-matching but also information distribution and liquidation settlement. We're fortifying system stability, catering for price surges and market expansion. In addition, the Busan Information Distribution System is set to incorporate a "derivative high-capacity service", offering real-time market price information across all derivatives.

Leveraging advanced IT technologies, we are tailoring our systems to facilitate sophisticated securities-derivatives trading techniques. This includes enhancements such as a high-speed algorithm trader management system. We're also capitalising on the rise of cloud technology within the financial industry, implementing a cloud-based smart workplace and using Robotic Process Automation (RPA) to automate repetitive tasks and streamline verification processes.

In response to changes in the Korean security token market, we are preparing to establish a pilot market for "Digital Security Products". This new service will run on KRX securities market platform (non-blockchain) and offer exchange-trading opportunities for newly emerging security types (i.e. Investment contracts) in accordance with Korea's capital markets law. In anticipation of this development, we are preparing to apply to the Financial Services Commission for the "Regulatory sandbox" and launch by year-end.

These advancements signify our commitment to enhancing market liquidity and invigorating the capital market by transforming our IT infrastructure. By assisting in the development of diverse order strategies and offering superior market-level risk management, we aim to foster a stable trading environment, furthering our mission of efficient, accessible, and technologically advanced financial services for all stakeholders.

 

How is the Korea Exchange planning to attract and retain global investors in the face of increasing competition from other global exchanges?

KRX is implementing a comprehensive set of measures to attract and retain global investors by improving the trading environment to meet international standards and enhance competition with other global exchanges.

Firstly, KRX plans to improve dividend payment practices by determining the dividend amount before, rather than after, the dividend record date. This anticipatory move will provide investors with a clearer understanding of their potential returns, thus enhancing their investment decision-making process.

Secondly, KRX is taking strides towards promoting better corporate transparency. They are mandating phased disclosure of English translations for listed corporations. Initially, this will be applied in 2024 to KOSPI-listed companies with assets exceeding 10 trillion won and expanded in 2026 to include those with assets over 2 trillion won. This measure will facilitate foreign investors' understanding and analysis of Korean firms, enhancing their accessibility to the Korean market.

In a move to ease volatility in the stock market, KRX plans to open the domestic derivatives market earlier, thereby allowing overnight market information to be absorbed and reflected in prices more efficiently. This initiative follows trends observed in other global markets such as Japan, Hong Kong, and Taiwan. Going forward, the derivative market is planned to be allowed night-time trading in the near future.

KRX also plans to abolish the foreign investor registration system by December 2023. This action will simplify the investment process by allowing foreigners to invest in listed securities in Korea without the need for prior registration procedures. The system will leverage standardised IDs like LEI for corporate entities and passport numbers for individuals, significantly enhancing the ease of access to Korean capital markets.

On the foreign exchange front, KRX is working closely with regulators to encourage foreign financial institutions' market participation. A revised Foreign Exchange Transaction Act, set for implementation in 2024, will allow approved foreign institutions to participate in the domestic interbank market. The opening time for this market will also be extended, with an ultimate goal of 24-hour operation, increasing the number of trading institutions and trading volume.

To further improve accessibility, a set of measures was announced in January 2023, aimed at enhancing foreign investors' access to Korean capital markets. These measures include the facilitation of foreign investors' use of omnibus accounts and convenient over-the-counter (OTC) transactions in phases.

Overall, these strategic measures are expected to boost foreign investment in the Korean market by aligning the investment environment with international standards, enhancing convenience for foreign investors, reducing market volatility, and improving corporate transparency.