Rate-rigging may hurt confidence in Korea

International lawsuits likely to follow if collusion is found


Concerns about a possible fall in international confidence in Korea’s financial markets are rising after the government launched a probe into alleged collusion by banks and brokerages to rig rates on certificates of deposit earlier this week.

Market observers said if allegations of the collusion are found to be true, it may lead foreigners to exit from the nation’s derivatives markets based on CD rates.

They also raised the possibility that international lawsuits may follow.

According to a report released by the Korea Financial Investment Association, the value of derivatives with underlying assets that are CDs is estimated to have reached more than 4,500 trillion won ($3.95 trillion).

“Even if other money market rates replace the CD rates, there is a high chance foreigners will massively unwind their positions on CD-based derivatives as it would take some time for a new benchmark rate to take root,” Yonhap News quoted an unnamed KFIA official as saying.

But some other market watchers remained cautious about such a possibility.

“Foreign investors betting on derivatives are already aware of the problems and mechanisms of CD rates. There might not be massive position-unwinding by foreigners,” an analyst at a local brokerage house told the news agency.

The CD rate is the benchmark rate for corporate and household loans. The interest rates of 56 percent of corporate loans and 23 percent of household loans are tied to the CD rate.

Early this week, the Fair Trade Commission launched a rare investigation into major local banks and brokerage houses over their suspected involvement in rigging rates on 91-day CDs.

News reports said the nation’s antitrust watchdog had found evidence showing financial firms’ rigged the interest rates for CDs.

An FTC official told local press on Friday that evidence was found during the probe on Tuesday and Wednesday. A brokerage firm had also confessed on Thursday that it colluded with other companies to rig CD rates, according to reports.

The FTC official declined to comment on the details of the discovered proof. Insiders, however, suspect that the evidence is likely to be documents and notes related to the regular meetings of different bank officials.

The FTC is known to have focused on the fact that officials in charge of banks that are members of the Korea Federation of Banks, hold regular meetings.

Insiders also noted, according to news reports, that FTC confiscated computers used in banks and brokerages in consideration that employers at financial institutions usually use online messengers to communicate.

The FTC is currently investigating 10 local brokerage houses and nine banks over suspicions that they colluded to fix interest rates of three-month CDs. The FTC investigation came as the CD rates remained relatively high when other market rates have dropped. The rate had remained unchanged at 3.54 percent for almost three months since March. Ever since FTC kicked off the investigations, however, the rate steadily dropped.

By Park Min-young (claire@heraldcorp.com)