"It is clear collusion," stated the Fair Trade Commission, while the securities industry countered, "What collusion is there when there is no loss to the national treasury?"
The Fair Trade Commission announced its decision on November 11 regarding whether there was collusion among primary dealers (PDs) during the bidding process for government bonds. The commission imposed a record fine of 1.6265 trillion won on the securities firms involved. The securities industry reacted strongly, arguing that the decision was incomprehensible and did not reflect the structural characteristics of the government bond issuance and distribution market. Both sides are sharply divided over three key issues: the appropriateness of the collusion judgment, whether there was a loss to the national treasury, and the criteria for calculating the fine.
Issue 1: Is Information Exchange Equivalent to Collusion?
The first issue is whether the exchange of information constitutes collusion. According to the Fair Trade Commission, 15 PDs shared bidding rates and volume information via messaging and phone calls just one to two minutes before the closing of 150 competitive bids for government bonds from January 2020 to June 2023. The commission concluded that collusion occurred in 145 of these cases regarding specific rates or volumes.In contrast, the securities industry argues that the nature of PD work differs from monopolistic pricing practices in telecommunications and distribution. An industry representative stated, "The PD role in government bonds is not highly profitable; rather, it involves participating to secure qualifications and contribute to the infrastructure for bond issuance and distribution." They further argued that it is unreasonable to classify business communication as collusion when there are no actual victims or national losses.
The industry also contends that information exchange among PDs is unavoidable, given that they represent multiple institutions, including insurance companies and pension funds, in bidding. They claim that the 'winning rate' for bids and the 'benchmark rate' for recognizing underwriting performance serve different purposes, limiting any competitive restriction. The Fair Trade Commission countered that since the winning rate is determined by summing the lowest bidding rates, all bids can influence the outcome.
Issue 2: Did It Cause Loss to the National Treasury?
The second issue is whether the collusion increased the government's borrowing costs for bonds. The Fair Trade Commission determined that the PDs prevented lower winning rates through competitive underwriting, resulting in losses to the national treasury. The commission's examiners and economic analysts submitted quantitative analyses of the impact on winning rates to the plenary session, but did not specify the exact increase or the amount of loss to the treasury.Conversely, the industry argues that they actually helped reduce the government's interest burden by underwriting bonds at rates lower than market rates. They assert that PDs contributed to lowering the government's interest costs by accepting bonds at rates similar to or lower than market rates to fulfill their underwriting obligations. They cite changes in rates after communication ceased following the investigation's initiation as evidence.
A representative from the financial investment industry noted, "After communication was halted due to the Fair Trade Commission's investigation, the government's bond issuance rates increased compared to the past. The commission's assertion that previous communication caused losses to the national treasury does not align with the actual situation on the ground."
Issue 3: Is the Fine Calculation Appropriate?
The third issue concerns the criteria for calculating the fine. The Fair Trade Commission viewed the government bond bidding as a form of collusion and applied the total winning amounts of the bonds, rather than the firms' operating revenues, as the relevant sales figure. The commission justified this by stating that using the contract amount is appropriate considering the legislative intent behind the bidding collusion provisions. Consequently, the commission calculated the final relevant sales figure at approximately 54 trillion won and set the fine rate at 4.5%. After reviewing evidence from individual bids, the number of violations was reduced, leading to a decrease in the relevant sales figure, and the fine was uniformly reduced by 30% considering the scale of unjust gains and the uniqueness of the bond market.In contrast, the securities industry argues that the winning amounts do not represent actual sales or profits but rather the underwriting amounts paid by the firms, and thus the calculation should be based on operating revenues. An industry representative stated, "According to Article 8 of the Fair Trade Act Enforcement Decree, actual operating revenues should be the basis, yet applying the total winning amounts of tens of trillions of won as relevant sales is excessive."
The announcement of the sanctions also sparked controversy over the fairness of the leniency program for self-reporting. Company A was reported to have received a fine in the hundreds of billions of won, but as the first self-reporter, the actual fine was reportedly reduced to zero. A representative from the financial investment industry remarked, "It is problematic to use messenger communications as evidence of collusion when there are no unjust gains or actual customer harm, but it is even more concerning that the firm leading the communication effectively received a fine waiver through the self-reporting system, which borders on moral hazard."
* This article has been translated by AI.
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