(1) Reasons for Proposal

This enactment introduces systematic rules and regulations concerning the calculation process of financial transactions indices used as benchmarks to determine payment amounts, etc. of financial transactions, thereby aiming to ensure the validity and reliability of financial transactions indices, strengthen the protection of financial consumers, and enhance the stability of the financial market.

(2) Major Provisions

A. Definition and application scope of financial transactions indices (Article 2 and Article 3)

1) Define “financial transactions index” as benchmark that is used to calculate the payment amount or value of financial transactions and instruments, and that meet certain requirements concerning calculation and disclosure. Define the institutions and operations etc., that are associated with the calculation process and subject to the regulations.

2) Specify that any act committed outside the Republic of Korea that may have a domestic influence shall also be subject to this Act. Exclude any domestic or international central administrative agency, local government, central bank, or public institution/organization entrusted/commissioned with administrative authority from being subject to the regulations on calculating institutions.

B. Designation and revocation of key indices (Article 4)

Allow the Financial Services Commission to designate as a key index any financial index that needs to be governed by this Act in consideration of such factors as the volume of the relevant financial transactions and feasibility of being substituted by other indices; and to revoke any such designation.

C. Registration of key index-calculating institutions (Article 5, Article 9)

1) Prescribe that calculating institutions of key indices shall file a registration with the Financial Services Commission after establishing valid calculation methods and systems to carry out such functions as: ① Disclosure and management of the calculation methods, ② Implementation of internal control regarding calculation operation, and ③ Inspection and improvement of submission operation.

2) Require any person who intends to register as a key index-calculating institution to prepare “Regulations on Calculation Operations” for calculating valid and reliable key indices and obtain approval from the Financial Services Commission.

※ (Regulations on Calculation Operations) ① Calculation method and procedure (calculation manual) of the key index and a guide to the key index, ② Standards and procedures to be observed by submitting institutions, ③Standards and procedures to be observed by the employees and executives of the calculating institution to manage any conflict of interest, etc., during the course of calculation operations, ④ Where calculation operations are outsourced, methods and procedures for handling affairs associated with the outsourcing of calculation operations, ⑤ Matters concerning the composition and operation of the governing committee

3) Given the diverse characteristics of key indices, prescribe that in the case of a key index for which it is impossible or significantly unreasonable to prepare or observe certain provisions of the Regulations on Calculation Operations, the relevant provisions may be relaxed or excluded from application.

4) Prescribe that key index-calculating institutions shall enter into contracts with submitting institutions to inspect and manage submission operations, and that important matters concerning the management of key indices shall be deliberated by the governing committee.

5) Prescribe that in the event of a merger of a key index-calculating institution or where calculation operations for a key index are transferred, the registration procedure for key index-calculating institutions specified in Article 5 shall be observed to ensure there are no gaps in the management of key indices.

D. Suspension/discontinuation of calculation and submission operations, etc. (Article 6)

To prevent damage to financial consumers and confusion in the financial market caused by a sudden suspension or discontinuation of calculation or submission operations, prescribe that a report shall be filed with the Financial Services Commission 6 months prior to any suspension/discontinuation, and authorize the Financial Services Commission, where necessary, to issue an order for continuation of the calculation or submission operations for up to 24 months.

E. Obligations, etc., of calculating institutions (Article 7)

1) Require key index-calculating institutions to publicly notify the Regulations on Calculation Operatons and to review the appropriateness thereof. Prescribe a specific code of conduct as to calculation operations such as the review of compliance and measures to minimize the influence of illegal acts, etc.

2) Require any key index-calculating institution that intends to modify its Regulations on Calculation Operations or suspend/discontinue its calculation operations to disclose relevant information using a website, etc., and to gather opinions from stakeholders

3) Require any institution which submits, calculates or uses key indices to record and maintain for 10 years any information relevant to operations subject to this Act.

F. Use of key indices (Article 8)

1) Obligate key index-using institutions to prepare an emergency plan applicable to financial transactions in the event that the calculation of a key index is discontinued, thereby protecting financial consumers

2) Obligate key index-using institutions to provide financial consumers with an explanation of the key index and emergency plan when entering into a financial contract or selling a financial instrument associated with a key index.

G. Prohibition of the manipulation, etc., of key indices (Article 10)

Prohibit the use of distortion, manipulation, or any other unlawful method when conducting key index submission or calculation operations and prohibit any act that may undermine the validity or reliability of an index due to a lack of reasonable care.

H. Authority to issue orders and inspections/penalties, etc. (Articles 11 through 17)

1) Authorize financial authorities to issue orders regarding submission operations, calculation operations, and the use of key indices to ensure the stability, etc., of financial transactions.

2) Allow the Financial Services Commission to take action against any submitting institution, calculating institution, or using institution of a financial index, and any employee or executive thereof, that has violated this Act or an order issued under this Act. Allow the authority under this Act to be partially entrusted to the head of a relevant administrative agency or the Governor of the Financial Supervisory Service.

3) Prescribe grounds on which to impose penalties on any person who has used distortion, manipulation, or any other unlawful method during the course of submission or calculation operations for a key index; and to impose penalty surcharges and liability for damages to restitute unjust enrichment.