Citing reckless management and a clause in the nation’s constitution, South Korea’s finance ministry has effectively nationalized the Korea Stock Exchange by categorizing it as a public institution.
KRX was privatized in 1988; however, the Korean government is now claiming the exchange is a de facto public institution because it derives more than 50% of its revenue from a monopolistic business, as per an article in the nation’s constitution. KRX management and unionized exchange employees fiercely oppose the move.
“It’s a very counter productive move. If you want Korea to be a regional force, the right model for exchanges in terms of governance and efficiencies, flexibility to spend money and sell debt, is to be publicly owned,” says Thomas S. Caldwell, chairman of Caldwell Financial Ltd., who specializes in exchange investment. He says public ownership speaks to a legal, investing and regulatory environment that encourages and engenders investment. Otherwise, the perception is of an arbitrary government-controlled environment that is likely to discourage international participation, he says. “Maybe they want to keep their domestic market domestic. But there are other exchanges in the region, like in Taiwan, that have a far more progressive look and are moving in that direction.”
The move would affect human resources and budgeting, as well as adjust salary levels and executive function.
In the United States, the backlash against executive pay has resulted in proposed legislation to limit executive pay for failing institutions taking government bailout money. “It’s resonating,” says Patrick Catania, CEO of the Asia West Group. He says despite recent examples of abuse, greed and huge amounts of risk assumed by traders in the United States, the exchange and clearing models have not been challenged. “Korea is taking a whole different stand, blaming the market losses, to an extent, on the exchanges and taking government control to appease the people,” he says, adding that for years, Korea has been a product-oriented market place. “With this huge global economic slowdown, this implies that the government wants to be at the steering wheel to direct the economy’s focus to the financial services economy, so that they are not totally reliant on manufacturing, as they have been for many years.”
A CME Group spokesperson said, at this time, an agreement to list the KRX’s Kospi 200 futures on CME Globex later this year is unaffected.