[Edaily Marketin, Reporter JI YEONG-EUI ] The National Pension Service (NPS) is moving to increase the number of securities firms it uses for trading—a figure it had drastically reduced three years ago with the aim of “enhancing the competitiveness of securities firms”—and is also pushing to cut by half the penalty points applied to firms that have been sanctioned by financial regulators. Given the total number of securities firms operating in Korea, this effectively opens the door for most firms to manage retirement funds. Concerns have been raised that significantly expanding the pool of high-risk trading partners could lower the level of risk management for the public’s retirement funds.

Reduced to Boost Competitiveness… But Increasing Again After 3 Years

According to the investment banking (IB) industry on the 5th, the National Pension Service is considering a plan to expand the number of securities firms selected for general domestic stock trading from the current 26 to around 36. It is also reported that a proposal to reduce the penalty points applied to securities firms with a history of sanctions from authorities—such as the Financial Services Commission and the Financial Supervisory Service—to half the current level is under review. Although nothing has been finalized yet, if the reorganization goes through, significant changes are expected in the selection system for domestic stock trading brokerages.

According to the Korea Financial Investment Association, there are 60 domestic and foreign securities firms operating in Korea. Of these, stock trading typically takes place through about 50 firms. If the NPS increases the number of securities firms for general trading to 36, it appears that most firms eligible to participate in trading will be selected.

The issue is that the National Pension Service reduced the number of trading firms just three years ago, citing a desire to raise their quality standards. In 2023, it scaled back the number of general trading firms selected from 36 to 26. The rationale given at the time was to enhance the competitiveness of securities firms and improve trading efficiency. This decision was based on the assessment that selecting too many brokerage firms would分散 trading volume across them, thereby weakening their incentive to provide high-quality research and trading services. The intent was to concentrate limited trading opportunities on competitive firms to enhance service quality. Nevertheless, the National Pension Service is now pushing for a restructuring in the exact opposite direction just three years later.

Furthermore, some point out that expanding the number of selected firms does not necessarily lead to improved operational efficiency. If trading volume is spread across a larger number of securities firms, individual firms may have less incentive to provide differentiated services to the National Pension Service.

A senior official at a securities firm stated, “This is a decision that abandons the competitiveness and management efficiency the National Pension Service sought to secure by reducing the number of securities firms in the past,” adding, “I don’t understand why they are reversing policy in this direction.”

Penalty Points for Sanctions Cut in Half… Relaxed Selection Criteria “Doubts About Whether This Helps the Pension Fund”

An even greater cause for concern is that, in addition to expanding the selection pool, the current reform is also considering a plan to significantly ease the penalty points applied in evaluations for sanctions imposed by financial authorities. When selecting brokerage firms, the National Pension Service conducts a comprehensive evaluation of research capabilities, corporate sales capabilities, financial soundness, and the history of sanctions imposed by regulatory authorities. A history of regulatory sanctions is one of the factors used to assess a counterparty’s level of internal controls and risk management. Critics point out that if the selection pool is expanded while penalty points for sanctions are halved, securities firms that previously received lower evaluations will inevitably have a higher chance of being selected.

An asset management industry official countered, “If we reduce the penalty points for sanctions and increase the number of trading firms, even those with relatively weak risk management and overall capabilities will be included,” and asked, “To improve the fund’s return on investment, isn’t it more important to maintain the ability to distinguish and select excellent securities firms rather than broadening the selection pool?”