SEC Division of Investment Management staff letter: Korea Securities Depository Corporation

. lA i 4 199~

p Our Ref. No. 93-65-CC
Korea Secur i ties
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Deposi tory corporation

DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

Your letters of February 1 and April 12, 1993, request our

assurance that we would not recommend enforcement action to the

Commission under Rule 17f-5(c) (2) (iii) of the Investment Company

Act of 1940 (the "1940 Act") if Korea Securities Depository

Corporation ("KSD") acts as an eligible foreign custodian for

u. S. registered investment companies. 11

You state that the Securities and Exchange Act of Korea (the

"SEA") authorizes the establishment of KSD, and KSD is wholly

owned by the Korea Stock Exchange (the "KSE"), the only stock exchange in Korea. . 2 1 According to your letters, KSD is the only central securities clearing agency and depository in Korea. with

respect to KSD' s role as the central depository, you state that

participants in the KSD, primarily Korean banks and securities

companies, open Participant Accounts and deposit securities with

KSD for safekeeping. dl Participants may deposit the following

types of securities ("eligible securities") with KSD:

11 section 17 (f) of the 1940 Act provides that every registered management investment company shall maintain its securities

and similar investments in the custody of (1) a bank meeting

certain requirements, (2) a member of a national securities

exchange, (3) the company itself, in accordance with

Commission rules, or (4) a system for the central handling

of securities pursuant to which all securities of any

particular class or series of any issuer deposited within

the system are treated as fungible and may be transferred or

pledged by bookkeeping entry without physical delivery of

such sßcurities, in accordance with Commission rules. Rule

17f-S provides an exemption from section 17 (f) to allow a

registered management investment company to deposit foreign

securities in the custody of an "eligible foreign

custodian." Rule 17f-S(c)
(2) (iii) defines the term

"eligible foreign custodian" to include "a securities

depository or clearing agency, incorporated or organized

under the laws of a country other than the United States,

which operates the central system for handling of securities

or equivalent book-entries in that country."

21 The KSE is a separate legal entity authorized and established under the SEA and is owned and operated by 32

Korean. securities companies.

dl A participant must be a qualified legal entity in Korea to

open a participant Account with KSD. As of December 31,

1992, KSD had 86 participants.

(a) all equity and debt securities listed on the KSE;

(b) all equity securities registered with the Korea

Securities Dealers Association ("KSDA");

(c) equity securities to be listed on the KSE or with the KSDA that were issued upon the exercise of rights under

other securities so listed or registered;

(d) unlisted bonds of an issuer that have the same terms

and conditions (other than the issue date) as bonds of

the same issuer that are listed on the KSE¡ and

(e) other securities designated by KSD. ~/

Eligible securities deposited with KSD are registered in the

name of KSD and held on a fungible basis. 2/ KSD holds

certificates evidencing these securities in its vault at its head

office located in Seoul or in a vault at one of its five branch

offices in Korea. You state that as of December 31, 1992,

approximately 51.1% of all shares and 20.9% of all bonds listed

on the KSE, &/ and 32% of all shares registered with the KSDA, 2/

were deposited with KSD. You state that no other entity in Korea

performs the same depository function performed by KSD. ~/

~/ To date, the only other securities designated by KSD as eligible securities are shares of a new Korean bank, Peace

Bank, which were publicly offered but have not been listed

on the KSE or registered with the KSDA.

á/ KSD is the stockholder of record for all shares it holds as

a depository.

&/ The 48.9% of listed shares and the 79.1% of listed bonds not deposited with KSD are owned by institutional investors and

individuals. You state that certain institutional investors

are required by law to deposit their securities with a bank

trustee, and other institutional investors generally hold

their non-KSD deposited securities in their own vaults or

wi th banks.
2/ You state that there is little trading in the over-the￾counter market operated by the KSDA and that KSD believes

most of the KSDA registered shares not deposited with KSD are held by controlling shareholders of the issuers. ~/ Telephone conversation with Messrs. Chang Bok Hur and Donald

L. Spafford, counsel to KSD, on April 13, 1993. Commercial

banks in Korea, however, are authorized and do hold

securities for their clients (on a non-fungible basis) as

their custodian.

KSD maintains a Participant Account Book for each

participant in KSD. KSD keeps separate records in the

Participant Account Book for securities deposited and owned by a

participant's clients and securities deposited and owned by the

participant itself. Each participant is required to maintain a

Client Account Book recording the securities belonging to a

client that the participant holds on behalf of the client through

KSD. '2/
In addition, you state that KSD operates and manages the

only clearing and settlement system for equity and debt

securities transactions on the KSE and for over-the-counter

market transactions in unlisted equity securities registered with

the KSDA. All these transactions are settled through KSD's

computer system by book-entry deli very. You state that there is

no central clearing and settlement system for transactions in

securities listed on the KSE or in unlisted equity securities

registered with the KSDA that are effected outside the KSE or

over-the-counter market, respectively, by physical delivery of

certificates and cash.

You state that the Ministry of Finance (the "MOF"), the

Securi ties and Exchange Commission of Korea (the "KSEC"), and the

Securities Supervisory Board (the "SSB") regulate KSD. The MOF

licenses KSD to engage in the securities clearing agency and

depository business and has authority to approve ancillary

businesses of KSD, impose sanctions on KSD or cancel KSD's

license under certain conditions, and approve or request

amendments to KSD' s Articles of Incorporation. KSD provides

annual reports to the MOF on its budget and financial results.

The KSEC issues regulations under the SEA and approves the rules

of the KSD regarding KSD's clearing and depository business and

the rates that KSD charges for fees. KSD submits annually its

financial statements to the Chairman of the KSEC. The SSB

conducts regular and special inspections of companies in the

securities industry, including KSD. KSD annually submits

internal audit and inspection plans, and reports on these audits

and inspection plans, to the Governor of the SSB.

You also note that under the SEA, if there is a shortage of securities of a client of a participant (~, a registered investment company) in KSD' s book-entry system as a result of

loss or theft of securities deposited with KSD through the

'2/ You also note that. Korean law requires each issuer to

maintain a book of stockholders and a book of beneficial

owners who own shares through KSD. The book of beneficial

owners is prepared on the basis of information supplied by

KSD and its participants as of each record date.

participant, KSD and that participant are jointly and severally

liable to deliver to that client the full amount of securities

owned by that client. Further, if KSD became insolvent,

securities deposited by participants with KSD as depository or by

investors with KSD as custodian would not be deemed assets of

KSD, and KSD' s creditors could not attach, seize, or otherwise

satisfy their claims with these securities.

On the basis of the facts and representations in your

letters, we would not recommend that the Commission take

enforcement action against KSD if, with respect to eligible

securi ties, it acts as an eligible foreign custodian for U. S.

registered investment companies. Because our position is based

on the facts and representations in your letters, you should note

that different facts or representations may require a different

conclusion. Further, this response expresses the Division's

position on enforcement action only and does not purport to

express any legal conclusions on the issues presented.

~K~
John K. Carter
Attorney

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Fel;.ruary 1, 1993

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  -- -. . .-...._~....-.~;'...,..
  Mr. Thomas S. Harman

Chief Counsel

Division of Investment Management

Uni ted states Securities and Exchange Commission

450 Fifth street, N.W.

Washington, D.C. 20549

U.S.A.
1940 Act/Section i 7 (f)
Dear Mr. Harman:

Korea Securities Depository Corporation ("KSD") is the only

central securities clearing agency and depositary in the Republic

of Korea ("Korea"). KSD respectfully requests assurance from you

that the Division of Investment Management would not recommend that

the United States Securities and Exchange Commission (the

"Commission") take any enforcement action under Section 17 (f) of

the United states Investment Company Act of 1940 (the "1940 Act")

or the Commission i s Rule 17f-5 thereunder if KSD acts as a foreign custodian pursuant to sub-paragraph (c) (2) (iii) of Rule 17 f-5 for the assets of investment companies registered under the 1940 Act.

We und'erstand that although the Commission's Rule 17 f- 5(c) (2) (iii). under the 1940 Act does not define the terms "securities 'depository" or "clearing agency", section 3 (a) (23) (A) of the Securities Exchange Act of 1934 (the" 1934 Act") defines the term "clearing agency" generally as an intermediary that makes payments or deliveries in connection with transactions in securities. We further understand that under section 3 (a) (23) (A) of the 1934 Act, the term "clearing agency" includes any entity, such as a "securities depository", that (1) acts as a custodian of securi ties in connection with a system for the central handling of securi ties whereby all securities of a particular class or series of an issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry wi thout physical del i very of securities certificates or (2) otherwise permits or facilitates the settlement of securities transactions without physical delivery of securities certificates. He confirm that KSD is a "clearing agency and securities depository" as defined above for purposes of Rule 17f-5(c) (2) (iii).

33 ''(aido-Do''; Youngoeungpo.-K....Seoi..;: KO'-:3 K.~r" Korea Se::u';:.e, .;"" Dee-OStiO') CO";::Y2~IC''' Tei 102: 782.52" Fax 102, 782.9283

1. General

The establishment of KSD is authorized by the Securities and

Exchange Act of Korea (the "SEA"). KSD is a limited liability

j oint stock company (in Korean, a chusik hoesa which is similar to

a corporation in the united States) established on December 6, 1974

under the Commercial Code of Korea. KSD has a Board of Directors

composed of seven directors. KSD is wholly owned by the Korea

stock Exchange (the "KSE"). The KSE is a separate legal entity

authorized by and established under the SEA. The KSE is owned and

managed by the 32 Korean securities companies that are members of

it. The KSE is the only stock exchange in Korea.

2. Eligible Securities

The fol lowing securities may be deposited with KSD as the

central clearing agency and depositary:

(a) all equity and debt securities listed on the KSE;

(b) all equity securities registered with the Korea

Securi ties Dealers Association, an industry association

authorized by the SEA;

(c) equity securities to be listed on the KSE or registered

wi th the Korea Securities Dealers Association which were

issued upon the exercise of rights under other securities

so listed or registered;

(d) unlisted bonds of an issuer that have the same terms and

condi tions (other than the issue date) as bonds of the

same issuer that are listed on the KSE; and

(e) other securities designated by the KSD.

To date, the only other securities designated by the KSD as

eligible securities are shares of a new Korean bank, Peace Bank,

which were publ icly offered but have not been 1 isted on the KSE or registered with the Korea Securities Dealers Association. Al I securities of any series or class of an issuer that is eligible or

has been designated as eligible for deposit with KSD may be

deposi ted with KSD as central clearing agency and depositary.

Currently, 51.1% of all listed shares are deposited with KSD

as central depositary. 20% of all listed bonds have been deposited

wi th KSD as central depositary. The lower percentage for listed

bonds is attributable, at least in part, to the fact that in terms

of trading volume, only 2% of all listed bonds are traded through

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the KSE.

Of the shares registered with the Korea Securities Dealers

Association, the KSD holds 32% as central depositary.

3. Safekeeping of Securities as Central Depositary

KSD holds eligible securities deposited with it by its

participants for safekeeping in its capacity as the only central securi ties clearing agency and depositary in Korea. For such deposi ts, KSD maintains a Participant Account Book for each participant. On the basis of information provided by each

participant, KSD records separately as a credit in the Participant

Account Book the securities so deposited that belong to the participant's cl ients and the securities that belong to the participant i tsel f. Each participant is also required to maintain a Ci ient Account Book recording the securities belonging to a

client that are held by the participant on behalf of the client

through the KSD. A participant must be a qualified legal entity in

order to open a Participant Account with KSD. As of December 3 i,

1992, KSD had 86 participants (primarily banks and securities

companies), including the Korean branches of eight foreign banks

and seven foreign securities companies.

Securi ties deposited with KSD as the central depositary in

Korea are registered in the name of KSD and held by KSD on a

fungible basis. Any certificates evidencing such securities are

kept by KSD in its vault at its head office located in Seoul or in

a vault at one of KSD i s five branch offices in Korea located at

Chonj u, Kwangj u, Pusan, Taegu and Taej eon. Under Korean law, a shareholder of a company may request that certificates evidencing

his shares not be issued. It is KSD's policy to hold certificates

in its vault evidencing at least 20% of each class of shares

deposi ted with it as central depositary and to hold the remaining

80% of such class in uncertificated form.

4. Book-Entry Securities Transfer System

KSD operates the only book-entry securities transfer system

for eligible securities in Korea. Under this system, the

settlement of securities transactions between participants (whether

for their own account or their client's account) occurs by

credi ting and debiting Participant Account Books instead of actual

delivery and receipt of physical securities certificates. The

legal effect of a book-entry securities transfer is the same as the

legal effect of del i very and receipt of physical securities

certificates. Book-entries for transactions executed through the

KSE or through the over-the-counter market trading room operated by

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the Korea Securities Dealers Association (the "OTC Market") between

participants (for their own account or their client's account) are

effected in accordance with clearing data received by KSD from the

KSE or trade data received by KSD from the Korea Securities Dealers

Association. Settlement of KSE transactions and OTC Market share

transactions is discussed in more detail below. Book-entry

transfers (other than as a result of such KSE or OTC Market

transactions) may be accomplished by the transferor participant

submi tting an application for such transfer to the KSD. A

participant may withdraw securities held for it by KSD by

submitting a withdrawal application to the KSD.

As a part of the book-entry system discussed above, KSD allows

pledges of securities to be recorded in a Participant Account Book

if both the pledgor and the pledgee are participants and the pledged securities are the pledgor i sown securities (rather than secur i ties held for a cl ient) . The pledgor must submit an appl ication i tsel f or consent to an appl ication by the pledgee to establish a pledge, and the pledgee must request or consent to a

request to withdraw pledged securities. KSD also allows a

participant trustee to request notation in the Participant Account

Book that certain securities in the participant trustee's own

account are held in trust. An investment manager of a trust may

also make such a request, but then the securities must be

transferred to the participant trustee's own account. Only the

trustee is allowed to request withdrawal of securities held in

t ru st.
5. Admini~tration of Beneficial Owners Rights

Korean law, each company must maintain a book of

stockholders and a book of beneficial owners who own shares through

Under
KSD. The book of beneficial owners is prepared on the basis of information suppl ied by KSD and its participants as of each record

date. An investor is a beneficial owner of securities as of any

date if he is the record owner in the Client Account Book of a

participant as of such date and the participant is the record owner

in the Participant Account Book of KSD as of such date. A company

must send stockholder notices to beneficial owners of record in its

book of beneficial owners as well as to stockholders of record in

its book of stockholders. KSD is the stockholder of record for all

shares held by it as central depositary.

KSD collects cash dividends paid on shares held by it and

distributes such dividends to its participants who in turn

distribute the dividends to their clients. KSD also receives new

shares issued without consideration (i. e., stock dividends and

bonus stock) and credits such shares to the appropriate Participant

- ~/~i~.-;.~'~'. ~o~F;~e(J:~9~~~-~.92~!-: ":C"'~2 ItS.'D Kc'''" S~'"' . CO CJ~ - - c; . ~ .- . ...~.. , - ~ ~ ,. ~ ~ . . .. _ ~ _ c:
Account Book. In the event of a rights issue to shareholders, KSD

will subscribe for new shares on behalf of a beneficial owner if

the beneficial owner has submitted an application to KSD and

deposi ted the subscription money with KSD.

Beneficial owners may directly exercise voting rights (in

person or by proxy) with respect to shares owned by them if they

submi t a declaration of intent to exercise their voting rights to

a participant or KSD. Alternatively, a beneficial owner may give

instructions through a participant to the KSD on how to exercise

such beneficial owner's voting rights. If a declaration of intent

or voting instructions are not received from any beneficial owners

at least five days before a stockholders meeting, KSD will

exercise, pursuant to a rule adopted by the KSEC, the voting rights

of such beneficial owners (but only Korean beneficial owners) in

the same proportion for and against a matter as the proportion of

votes actually cast by stockholders of record (other than KSD) and

beneficial owners, unless the stockholders meeting has been called

to adopt special resolutions or resolve a dispute over management rights. KSD also collects payments of principal and interest made on

bonds held by it and distributes the same to its participants who

in turn distribute such payments (less any tax required to be

withheld) to their clients. Upon application by a participant, KSD

will exercise bondholder rights (such as conversion rights) under

bonds held by it for such participant.

6. Clearing Agent

KSD operates and manages the only clearing and settlement

system for equity and debt securities transactions on the KSE. All

transactions on the KSE are settled through KSD' s computer system

by book-entry delivery. Settlement of such securities transactions

occurs two days after the trade date. From the Stock Market

Automated Trading System, a computer system operated by Korea

Securities Computer Corporation for the KSE, KSD receives clearing

data. KSD issues settlement notices to securities companies

informing them of the securities and/or cash (determined on a daily

net basis by the KSE for each class of an issuer's shares and each

series of an issuer's debt securities) to be delivered to KSD or

deposi ted in KSD i S bank account, as appropriate. Each securities company maintains an account at the same bank as KSD, and funds for

settlement are transferred electronically from the accounts of the

securi ties companies to KSD i S account and vice versa. KSD IS

clearing and settlement system for KSE transactions provides for

book-entry transfer and cash settlement on the same day. There is

no central clearing and settlement system for transactions in

33 Yo,c..-i.J:;~': YOi."Qde.)"::',-' 5-:.-. ¡.~~.¿:
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physical delivery of certificates and cash.

The Korea Securities Dealers Association operates the trading room for the OTC Market for transactions in unl isted equity securi ties registered wi th the Korea Securi ties Dealers

Association. KSD operates the only clearing and settlement system

for the OTC Market for transactions in unlisted equity securities registered with the Korea Securities Dealers Association. All such transactions in the OTC Market are settled through KSD' s computer

system by book-entry delivery. The settlement of OTC Market share

transactions is similar to the settlement of KSE transactions. KSD

receives trade data from the Korea Securities Dealers Association.

KSD then determines the net amount of shares or cash due from

securi ties companies (on a daily basis for each class of an

issuer's shares registered with the Korea Securities Dealers

Association) and provides settlement statements to the securities

companies. KSD' s clearing and settlement system for OTC Market

share transactions provides for book-entry transfer and cash

settlement on the same day. There is no central clearing and

settlement system for transactions in unlisted equity securities

registered with the Korea Securities Dealers Association that are effected outside the OTC Market by physical delivery of certificates and cash.

There is no central clearing and settlement system for

transactions in government or corporate debt securities traded

over-the-counter or other securities not eligible for deposit with

KSD as central depositary.

7. Safekeeping of Securities as Custodian

In addition to acting as central depositary, KSD provides a separate custodian service to investors. Investors may deposit securities (on a non-fungible basis) with KSD as custodian for safekeeping. These securities are stored separately by KSD (not collectively as are securities held by KSD as the central clearing agency and depositary), and KSD is required to return to an investor the same securities certi f icates as were deposited by the investor.
8. Regulation of KSD in Korea

The KSD is regulated by the Ministry of Finance (the "MOF"),

the Securities and Exchange Commission of Korea (the "KSEC") and

the Securities Supervisory Board (the "SSB").

The MOF is primarily responsible for the interpretation and

~~ ~'g;C:';:.;. ~'ou;f)~e(Õ~;~~~;~92¡;: ~ K:"~S K."S'D 1\00ea Se:' 1."5 .r'--..-.; 'r r'"'~'"""._. ,-t:~'__-''-'.' ..;.. ..~..o,'~. enforcement of the SEA. Its responsibilities include the supervision of the KSEC, the SSB and the KSE as well as the KSD.

The MOF has licensed the KSD to engage in the securities clearing

agency and depositary business and has the authority to do the

following:
(i) approve ancillary businesses (such as transfer agency

services) of KSD;

(ii) impose sanctions on KSD (such as partial or total

suspension of business) or cancel KSD' s license if KSD

violates the SEA or any regulations or any order issued

under the SEA; and

(i) approve any amendment of KSD' s Articles of Incorporation or order KSD to amend its Articles of Incorporation or

its rules regarding its business.

KSD reports annually to the MOF on its budget and financial

resul ts.

The KSEC is composed of nine commissioners, including the

Governor of the Bank of Korea, the President of the KSE, a Vice

Minister of Finance, and six members appointed by the President of

Korea on the recommendation of the Minister of Finance. The KSEC

issues regulations under the SEA and approves the rules of the KSD

regarding KSD i s clearing and depositary business and the rates at

which fees may be charged by KSD. The KSEC may order KSD to

dismiss an ~. executive officer in certain cases. KSD submits

annually to ~he Chairman of the KSEC its financial statements. KSD

must also report to the Chairman of the KSEC the appointment and

any change of its independent certi f ied publ ic accountants. The SSB, a separate agency which acts as the executive

department of the KSEC, is responsible for day-to-day matters

relating to the monitoring of the securities markets and

supervision of the securities industry. The SSB conducts regular

and special inspections of companies in the securities industry,

including KSD. KSD annually submits internal audit and inspection

plans, and reports on such audits and inspections, to the Governor

of the SSB. KSD also reports monthly to the Governor of the SSB on

the stock held in its custody on behalf of foreigners.

9. Liabiiîty, Ownership, Insurance and Indemnification

Under the SEA, if there is a shortage in securities of a

cl ient of a participant in KSD' s book-entry system as a result of

loss or theft of securities deposited with KSD through the

C"¿'~
K."r'D 1\2'fó Se2..'.I.~5 ~~ D2~':'S'C"J Cor:i':.'a:.:.;~ . ~gJ:i;~;~.. ~ ~'ou~f~Qe(~;9;';~g2¡_~:: ~ participant, the KSD and such participant are jointly and severally

liable to deliver to such client the full amount of securities

owned by such client.

If the KSD were to become insolvent, securities deposited by

participants with the KSD as central depositary or by investors

wi th KSD as custodian would not be deemed assets of KSD and KSD' s credi tors could not attach, seize or otherwise satisfy their claims wi th such securities. Because KSD is the only central clearing

agency and depositary in Korea and is wholly-owned by the KSE, it

is unl ikely for KSD to become insolvent.

KSD currently maintains the following insurance coverage:

(a) a financial institution global indemnity insurance pol icy covering losses up to two billion Won (W2,000,000,000)

(about 2.5 million United states Dollars at W785=US$1.00)

per incident and up to four billion Won (W4,000,000,000)

(about 5.1 million united states Dollars) per year

resul ting from fire, theft, or fraud and other kinds of

willful misconduct by KSD's employees; and

(b) an insurance policy covering losses up to ten billion six

hundred million Won (W10,600,000,000) (about 13.5 million

Uni ted states Dol lars) resulting from the negl igence of

KSD's employees in performing their jobs.

The KSE maintains a j oint compensation fund into which each

securi ties company that is a member of the KSE must deposit an

amount equal to a certain percentage of its trading value. This

fund is used to compensate investors for losses arising from a

breach of a brokerage contract by any securities company. Member

firms must also place with the KSE a fidelity guaranty deposit in

an amount up to fifty million Won (W50,OOO,000) (about 63.7

thousand United states Dollars). If a member firm of the KSE fails

to fulfill its obligations to the KSE or any other member firm

arising from a securities transaction effected through the KSE, the

KSE may apply the defaulting member firm's fidelity guaranty

deposi t to satisfy such obI igations.

As aforesaid, KSD is the only central securities clearing agency and depositary in Korea. Therefore, KSD respectfully requests assurance from you that the Division of Investment

Management would not recommend that the Commission take any

enforcement action under section 17 (f) of the 1940 Act or Rule 17 f￾5 if KSD acts as a foreign custodian pursuant to sub-paragraph

(c) (2) (ii i) of Rule 17 f-5 for the assets of investment companies registered under the 1940 Act.

Vr'rt Ko'ea Se:u'i'e,' 33. Yold::..Oon; )'ou~goe¡;ngD:"":U Seo~' Ko'ea Tei (02.' 782.5271 Fa' (02: 782.928:' n~u Depository C8r~O.'2~1:-"" Should you wish to send any correspondence to US, please

address them to my attention at KSD' s address stated in the

letterhead above and send a copy of such correspondence to our

legal counsel Shin & Kim at C.P.O. Box 8261, Seoul, Korea

(Attention: Messrs. Chang Bok Hur and Donald L. Spafford, Jr.). If

you should desire to speak with someone about the foregoing, please

call either Mr. Chang Bok Hur or Mr. Donald L. Spafford, Jr. at

Shin & Kim (ph. 011-822-316-4203/4232).

Very truly yours,

-'5 ~
Wang Sun Jun

Chairman &
Chief Executive Officer

APR 12 '93 17:32 T
SHIN & KIM

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-JUSTICE"
April 12, 1993
Via Facsimile

John K. Carter, Esq.

Office of Chief Counsel

Division of Investment Management

o. S. Securities and Exchange Commission

Washington, D.C. 20549

o. S .A.

Re: Korea Securi ties Depos! tOry Corporation

(Our Ref. # K40v-201)

Dear Mr. Carter:
Thank you for your fax of April 9, 1993.

We have the following answers to the questions set forth in your April 6th fax:

1. Korea Securities Depositoi.i' Corporation (1fKSD") is the

only securities clearing agency in Korea and the only central securities depository in Korea. No other company in Korea provides the depository service that KSD does. Commercial banks in K-.rea i however, are authorized to and do hold securities for their clients

(on a non-fungible basis) as their custodian.

2. The following indicates as of December 31, 1992, how

shares and bonds listed on the Korea Stock Exchange

("KSE") but not depos~ ~ed with KSD and shares registered . with the Korea Securities Dealers Association ("KSDA") but not deposited with KSD are held:
A. Listed Shares

KSD 51. i%
Institutional investors 21.0%*
(other than securities companies)
Individuals 27.9%
100.0%

• Of this amount, 41.3% are shares owned by

APR 12 '93 17:33 T
SHIN & KIM securi ties investment trust companies which are

required by law to deposit their securities with

a bank trustee. Other institutional investors

generally hold their non-KSD deposited securities

in their own vaults or with banks. Securities

companies are required to deposit with KSD any

listed shares that they own.
B. Listed Bonds
KSD 20.9%
Institutional investors
(including securities companies) * Indi viduals 44.3% 34.8% 100.0% *. KSD holds 20.9% (not 20% as stated in KSD's February 1st letter) of the bonds listed on the KSE.

• Securities investment trust companies must

deposit their securities with a bank trustee.

Other institutional investors hold their non-KSD

deposited securities in their own vaul~s or with

a bank.

C. Registered Shares (68% not held by KSD)

Companies whose shares are registered with the

KSDA are mostly small to med~~~-sized companies.

There is very little trading of their shares in

the over-the-counter market operated by the KSDA

(the trading volume on the OTe market is less than 1% of the trading volume on the KSE). Thus, no breakdown is readily available for how these

shares are held. KSD believes most of these shares are held by a few controlling shareholders of each company.

3. KSDA is a self-regulatory industry association similar

to the National Association of Securities Dealer, Inc.

in the United States. There are currently 39 members

of the KSDA, The KSDA adopts various rules (such as

rules on advertising, solicitation of business,

employees, use of forms and maintenance of accounts)

with which its members must comply. KSDA's primary

function i~ to regulate the relationship between its

members.

r."l
SHIN Be KIM
KSDA established the over-the-counter market for KSDA

registered shares in 1987. A membr of the KSDA must

act as a sponsor for securities to be registered with the KSDA. Securities may not be both registered with the KSDA and listed on the KSE. If securities

registered with the KSDA become listed on the KSE, the

KSDA will automatically cancel the registration of

such securities with the KSDA.

We look forward to discussing this matter with you tomorrow

morning at 9:30 a.m. (Washington, D.C. time).

Very truly yours,

c-- "'- ~ ~
Chang Bok Hur

CSH/XWS/PLS '~k:303C.opr)

cc: Mr. Sung-Ho Lee

General Manager

Korea Securities Depository Corporation