Samsung Securities will start a fully fledged prime broking business in January next year without the need to raise fresh capital as Korea’s brokerage sector readies itself for a two-tier market.

The Financial Services Commission (FSC) last week unveiled amendments to the nation’s Capital Market Consolidation Act, which was originally passed four years ago.

One of the main revisions will enable large brokerage firms to provide corporate financing for the first time and tap into much-needed new sources of revenue such as capital lending for corporate M&A as well as hedge fund servicing.

The move will effectively see these firms reclassified as home-grown investment banks able to underwrite large projects in an area that has been dominated by commercial banks to date.

The FSC says the amendments will give Korea’s financial system a more diversified structure. It sets minimum equity capital required for investment banks at $2.9 billion, and local sources say five domestic brokerages are likely to qualify: Samsung Securities, Woori Investment & Securities, Daewoo Securities, Hyundai Securities, and Korea Investment & Securities.

The share prices at these firms all soared on the news from close on July 25 to close on July 26, led by Samsung Securities’ 5.3% jump.

However, Shin Bo-Sung, research fellow at Korea Capital Market Institute, points out “there is no assurance all five companies will get prime brokerage business because the Korean government is very serious about the $2.9 billion capital required. In fact, it may go up later on”.

He notes that while Samsung Securities and Daewoo Securities have already qualified and can start prime brokerage businesses for hedge funds, “the rest of them are not quite sure, although the market expects they will do their best to be qualified by capital-raising”.

Joon Young-Keun, head of derivatives and e-trading business at Samsung Securities, tells AsianInvestor the firm does not need to raise extra capital and will benefit from an infrastructure build-up on research and sales in Hong Kong, enabling it to provide competitive services.

“By the end of this year we will complete the IT infrastructure and seeding investments system for providing the credit necessary for hedge fund business,” he says. “As such, Samsung will start its business full-scale in January 2012.”

Shin added that the strict entry requirement would drive local brokerages into a two-tier market: big firms versus niche players, which is expected to spark industry consolidation.

“This is the reason that the government requires a large amount of capital necessary for doing hedge fund business,” he says. “Local hedge fund business will start this Autumn, regardless of the process of the act (with new provisions not due to be in place until June 2012).

“Since prime brokerage work has never been done by Korean securities firms before it will have a big impact on the share of the local market and move the industry structure towards more of a global standard.”

Revisions to the Act will include the establishment of a new Over-the-Counter (OTC) exchange, which will impact the monopoly status of the Korea Exchange and allow trading of non-listed stocks.

The main purpose of this ‘alternative trading system’ is to provide market participants with quicker stock transactions and lower trading costs.