New Korean fund-distribution system to launch in 2011

Korea Securities Depository (KSD) will go live with Euroclear Bank's automated funds-processing platform, FundSettle, by the third quarter of next year. The depository also expects to launch a multi-currency cross-border fund-distribution system at around the same time.

This year, KSD will set up a reference group to design the new business process for the distribution system, says Tony Park, senior manager at KSD in Seoul. The group -- comprising Korean distributors, custodians, trustees and fund managers -- will work out the best solution for communicating with FundSettle and will then analyse FundSettle's business process. KSD will then develop a system in the first half of 2011, before launching it around September, after a two-month test.

Brussels-based international central securities depository Euroclear and KSD will also organise cross-entity training programmes for the new platform.

"We expect offshore fund distribution in Korea will gradually increase, especially with regard to funds of funds," says Park, citing the recent removal of the capital-gains tax (CGT) exemption for locally domiciled mutual funds investing in overseas equities. The exemption from the CGT levy of 15.4% to 37% on these investments had, since 1997, given locally domiciled funds an advantage over their offshore-domiciled peers. The exemption came to an end on December 31. 

As for the new automated, multi-currency fund-transaction-processing solution, KSD looked at both ClearStream's Vestima and FundSettle before choosing the latter. After getting feedback from distributors, custodians and trustees and asset managers, the depository decided FundSettle offers "comparative advantages in terms of service price, customer service and service coverage", Park tells AsianInvestor.

However, Clearstream has an edge in system convenience, he adds, as it offers higher straight-through processing (STP) rates.

KSD is a transfer agent for all Korea-domiciled investment funds, connecting to local fund distributors and trustees. The link with FundSettle will enable Korean investors to use KSD as the central access point for investing in international funds. 

Following the switch, FundSettle will provide cost savings of 80-85% for distributors and trustee banks, says Park.

For the domestic funds market, KSD already uses FundNet, a fully automated fund-processing and messaging hub, but it does not provide such a solution for offshore funds. Korean fund distributors now process funds manually, although a few custodians and trustee banks use FundSettle or Vestima.

Now 942 funds are being processed manually, but next year around 43,000 funds will be able to access the new system. And if market participants demand more funds, it will be possible to launch them on the platform, says Park. Dollar, euro and yen are available via manual processing and will also be available in the new system.

"Transactions will be processed on a straight-through basis, involving no manual processing, which means at low risk," says Soo-Hwa Lee, chairman and chief executive at KSD. "As a result of this initiative, we expect a substantial increase in STP rates from close to zero to more than 90% for cross-border investment fund processing."

With the addition of the KSD, investors using Euroclear in Asia can trade and settle securities in 10 markets, including Australia, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore and Thailand.

Euroclear set up a link with KSD in September to offer settlement, custody and related services for Korean Treasury Bonds and Monetary Stabilisation Bonds. The two entities also signed a memorandum of understanding last year to explore how best to cooperate in supporting international clients that are active in the Korean capital markets and Korean entities interested in the markets covered by Euroclear.

Euroclear Bank provides settlement and related securities services for cross-border transactions involving domestic and international bonds, equities, derivatives and investment funds. It has been operating out of the Asia-Pacific region since 1987.