[Edaily Marketin JI YEONG-EUI Reporter] Financial institutions that have been purchasing government bonds—issued by the government to raise funds for national finances—have received fines totaling a record-high amount. The Fair Trade Commission imposed fines exceeding 1.6 trillion won, alleging that these institutions colluded on interest rates and volume during government bond auctions.

The securities industry is pushing back, arguing that the government imposed the massive fines without considering the unique characteristics of the market, despite having mandated the purchase of government bonds and market-making obligations. Some securities firms saw their quarterly earnings, which had been in the black, turn into losses as they had to reflect fines amounting to hundreds of billions of won in their financial results.

The problem is that these sanctions could backfire on the government as well. There are concerns that if financial institutions become reluctant to purchase government bonds, competition in auctions will weaken, and the government’s interest burden for borrowing money could actually increase. With large-scale litigation over the appropriateness of the fine calculations looming, the fallout appears to be growing.

From Profit to Loss Due to Hundreds of Billions in Fines… Credit Impact Remains Limited

According to the investment banking (IB) industry on the 14th, the Fair Trade Commission (FTC) decided on the 11th to impose a total of 1.6266 trillion won in fines on 15 financial firms involved in collusion during government bond auctions. This is the largest amount ever imposed for a single case. The fines imposed on 10 securities firms alone totaled approximately 1.376 trillion won, accounting for over 84% of the total.

By company, KB Securities faces the highest fine at 332.2 billion won. NH Investment & Securities followed with 242.8 billion won, Mirae Asset Securities with 214.8 billion won, Shinhan Investment Securities with 147.3 billion won, Daishin Securities with 120.1 billion won, and Samsung Securities with 118.9 billion won. The KFTC decided to refer seven financial firms—including KB Securities, NH Investment & Securities, and Mirae Asset Securities—to the Serious Crimes Investigation Agency, taking into account factors such as the duration of their participation and the number of bids involved.

The impact of the fines was immediately reflected in their financial results. KB Securities revised its third-quarter consolidated net income from the previously reported 273 billion won to a net loss of 59.1 billion won. Consequently, its cumulative net income for January through September also fell from 1.074 trillion won to 741.9 billion won.

Kiwoom Securities also saw its third-quarter net income decrease by 60.8 billion won, from 238.6 billion won to 177.8 billion won, after reflecting a fine of 83.8 billion won. Daishin Securities’ third-quarter net loss widened from the previously reported 13.7 billion won to 133.8 billion won. Although revenue and operating profit remained unchanged for all three companies, their final profits fell significantly as the fines were recorded as non-operating expenses. Other securities firms that have not yet finalized their accounting treatment for the fines are also likely to face pressure on their earnings.

However, it appears unlikely that these sanctions will directly lead to a credit crisis for securities firms. Domestic credit rating agencies have assessed that the temporary decline in profits resulting from the fines should be viewed separately from the debt repayment capacity of financial institutions. According to NICE Credit Rating, as of the end of June, the fines amounted to 0.3–4.2% of each securities firm’s total capital. Analysts suggest this is a manageable amount, considering the firms’ existing profit-generating capacity and liquidity resilience. Korea Ratings also predicted that while a decline in profitability is inevitable for securities firms, the impact on their creditworthiness will be limited due to their sufficient capital buffers.

“We bought government bonds as the government urged us to—and now we’re facing fines?”… Legal Battle Looms

The core of the securities firms’ objection lies in the method used to calculate the fines. The Fair Trade Commission (FTC) calculated the relevant revenue based on the approximately 54 trillion won in winning bids for government bonds related to the collusion and applied a penalty rate of 4.5%. It subsequently reduced the fines by 30%, taking into account that the entire winning bid amount could not be considered unjust enrichment for the financial institutions.

The securities industry argues that treating the winning bid amount for government bonds as revenue is unreasonable to begin with. This is because just because a securities firm underwrote 10 billion won worth of government bonds does not mean it earned 10 billion won. They contend that the fines should be calculated based on the operating income actually generated during the process of underwriting and trading the government bonds.

On the other hand, the Fair Trade Commission determined that the method for calculating revenue in the general financial sector differs from the method for calculating fines for bid-rigging. It explained that, considering the special provisions applicable to bid-rigging under the Fair Trade Act, it is reasonable to use the winning bid amount as the basis. The fact that the fine was significantly reduced from initial expectations is also the result of narrowing the scope of the recognized collusion and reflecting various mitigating factors during the deliberation process.

A debate over the collusive acts themselves is also expected. The Fair Trade Commission determined that, from January 2020 to June 2023, financial institutions exchanged interest rate information in advance or agreed on bid volumes in 150 government bond auctions. In 145 of these cases, the commission found that agreements went beyond mere information exchange to include specific bid rates or volumes. It was reported that evidence was even found at some companies showing that contact information for competitors’ representatives and methods for exchanging information were passed on to successors during handover procedures.

The Fair Trade Commission determined that the collusion restricted competitive bidding and artificially inflated the winning yields on government bonds, thereby increasing the government’s borrowing costs. However, while the Commission stated that it had conducted a quantitative analysis, it did not disclose the specific amount of loss to the national treasury.

Market participants argue that the unique nature of the Treasury Bond Primary Dealer (PD) system must be taken into account. PDs are financial institutions designated by the government to ensure the stable issuance of Treasury bonds. In exchange for the obligation to underwrite a certain volume of Treasury bonds and contribute to the vitality of trading in the secondary market, they receive benefits such as the right to non-competitive underwriting and financial support. The industry’s argument is that the business structure differs from that of general competitive bidding.

Legal action is also taking shape. Meritz Securities has preemptively announced its intention to file an administrative lawsuit, stating that it finds it difficult to admit to the collusion. Other securities firms are also actively considering legal action regarding the appropriateness of the fine calculation and the scope of the admitted collusion, creating an atmosphere in which a legal battle appears virtually inevitable.

The impact on the Treasury bond market following the sanctions is another variable. Concerns have been raised that financial institutions may become less active in Treasury bond auctions as they reassess the burden of fines and the profitability of their PD operations. If bidding competition weakens, there is a possibility that the interest rates the government must pay when issuing Treasury bonds could rise. Another issue is how the Ministry of Finance and Economy will revise regulations regarding the maintenance of PD qualifications and standards for information sharing.

The Securities Sector Headquarters of the National Office and Financial Services Workers’ Union issued a statement on the 13th, stating, “The Ministry of Economy and Finance has also encouraged underwriting performance without even establishing clear guidelines regarding information sharing among PDs,” and questioned, “Is it truly normal state administration for the government to pressure dealers to buy government bonds on one hand, while punishing them for collusion in that process on the other?”

They continued, “The government is shifting the blame for the system’s structural flaws and the lack of coordination between ministries onto bond dealers and financial workers on the front lines,” and urged, “It must take steps to fundamentally address the contradictions in the Treasury Bond Specialist Dealer system.”