The Role of Self-Regulation in Supporting Koreas Securities Markets

This short article was initially prepared for a December 2001 conference sponsored by the Korea Stock Exchange (KSE). It reviews the scope of self-regulation by stock exchanges and offers suggestions for the main Korean stock exchanges, the KSE and the KOSDAQ. I argue that self-regulation should be understood broadly to include regulation of listed companies through quality standards, disclosure standards, and governance rules; regulation of broker-dealers; regulation of trading; and, perhaps most basic, regulation of the exchanges organizational structure. The most important elements of selfregulation are regulation of listed companies and the exchange's organizational structure (which impacts its incentives to engage in other forms of self-regulation). To compete for trading in shares of cross-listed Korean companies, Korea will need both legislative change and stronger self-regulation of listed companies. The government should amend the Securities Transaction Law to repeal the securities transaction tax and permit demutualization of the KSE and the KOSDAQ. The government and the stock exchanges must upgrade both the on-the-ground reality (which will lag behind changes in formal rules) and investor perception (which will lag behind the on-the-ground reality) of Korea's disclosure and corporate governance regime. Stronger listing standards can be important components of that investor protection effort