South Korea's Financial Supervisory Service has urged securities firms to strengthen soundness and liquidity management and internal controls in line with the expansion of corporate paper and integrated margin account (IMA) markets. It said high-yield corporate paper products should be managed at sustainable levels and that the supply of venture capital should move beyond quantitative expansion to qualitative improvement.

The FSS said on Wednesday it held a meeting at the Korea Financial Investment Association attended by chief risk officers and heads of investment management at nine comprehensive financial investment businesses to discuss measures to strengthen risk management and internal controls related to corporate paper and IMA.

Seo Jae-wan (서재완), assistant governor for the FSS's financial investment division, said the market is expected to keep growing, citing new approvals for corporate paper at two firms and an expansion in products eligible for inclusion in retirement pensions. He stressed that investor protection and a stable supply of venture capital are possible only under high-level risk management and internal controls.

The FSS said corporate paper and IMA funding rose to 59.5 trillion won as of end-June this year from 52.5 trillion won at the end of last year and 41.5 trillion won at the end of 2024. IMA outstanding also increased to 3.6 trillion won as of end-June from 1.2 trillion won at the end of last year.

It also stressed the need to manage soundness as the market expands.

The FSS urged firms to take pre-emptive steps against the risk of deterioration in high-risk investment assets such as overseas investments amid high uncertainty at home and abroad, including interest rates and stock prices.

It said that with high-yield corporate paper products being launched alongside recent increases in market interest rates, securities firms need to manage them at sustainable levels they can bear. It also told firms to strengthen liquidity and payment capacity management, including stress analysis, contingency funding plans and recovery plans for long-term managed assets.

For venture-capital supply, it put the focus on qualitative improvement rather than scale.

Venture-capital supply by comprehensive financial investment businesses rose 19.0 percent to 15.9511 trillion won at the end of the second quarter from 13.4040 trillion won at the end of the first quarter. The ratio of venture-capital supply to corporate paper and IMA funding also rose 3.4 percentage points to 26.8 percent from 23.4 percent.

The FSS stressed the need to actively identify companies with technological capabilities and growth potential that are in investment blind spots, and to diversify channels for supplying venture capital to venture and innovative companies.

It also cited a case in which KB Securities is reviewing investments in innovative companies such as regional artificial intelligence firms after receiving proposals for venture investment funds through its venture-capital investment platform.

Conflicts of interest and internal control issues in the management process for corporate paper and IMA were also put on the review list.

The FSS said it is preparing best practice standards for risk management in corporate credit provision together with the financial investment industry, adding that firms need to prevent conflicts of interest with proprietary assets and establish effective information barriers.

The standards are set to include the expertise and independence of review staff, review criteria for a company's business, industry and financial risks and repayment plans, and post-monitoring of credit status and repayment capacity.

The FSS said it is separately refining standards for information barriers and conflict-of-interest prevention related to corporate paper and IMA. It is currently operating a task force with the industry to discuss the scope of information, criteria and operating procedures.

It also urged securities firms to be cautious in connection with the recently implemented temporary exemption from the obligation to maintain margin loan collateral ratios.

The FSS stressed that firms should clearly inform investors of each firm's application standards and faithfully implement existing measures to strengthen self-regulation of margin loans so that the move does not lead to an expansion of debt-financed investing.

Securities firms that attended the meeting said they will re-examine investor protection systems and reflect supervisory authorities' guidelines in internal rules and procedures.

Newly approved businesses also said they will focus on soundness and liquidity management for the time being and secure investor trust through stable operations.