KSD Global Custody Services: Cross-Border Securities Settlement

1. Hae-Il Jang Managing Director Korea Securities Depository KSD’s Global Custody Services

2. KSD Overview ※Participants of KSD Central Securities Depository of Korea Founded in 1974 under the Commercial Code and transformed in 1994 under the Securities & Exchange Act 59 shareholders including KRX, securities companies, banks, etc and 1,067 participants including securities companies, banks, insurance companies, etc. (Dec. 31, 2010) Supervised by Ministry of Strategy & Finance, Financial Services Commission (FSC), and Financial Supervisory Service (FSS)

3. Primary Market Services Derivatives Market Services Asset Management Support Deposit & Settlement Services KSD Overview Core Infrastructure of the Capital Market International Deposit & Settlement • Securities Deposit • Securities Settlement • Entitlements Processing •Global Custody Service • Local Custody Service • KDR Depositary • Custody for ADR underlying shares • Transfer Agent Services • Bond Registration Service • SLB Intermediary • Repo Services • Secured Call Management • Collateral Management for OTC transaction • FundNet Service (deposit, establishment, redemption, settlement) • Fund Servicing (calculate, disclose NAV) Low Cost ㆍHigh Efficiency Global Standard

4. KSD’s global services • One Single Gateway for Global Investment Custodian for ADR(GDR) Underlying Shares Overseas Market Korean Companies Primary Market KDR Depositary 국내증권시장 Korean Market Foreign Companies Global Custody Service 국내증권시장 Overseas Market Korean Investors Secondary Market Local Custody Service 국내증권시장 Korean Market Foreign Investors

5. Cross-border Securities Settlement Channel • 6 Models for Cross-border Securities Settlement by BIS Global Custodian Local Agent ICSD 6 Models for Cross-border Securities Settlement Direct Access CSD Linkage Multi CSD Model • These modelsvary by “legislation structure”, “market practices for investment” and “openness for foreign financial organization”

6. Global custody service for domestic investors • Unique model that CSD provides global custody service by expanding the scope of its eligible securities from domestic securities to global securities • - cross-border custody, settlement and corporate action services over the 36 markets of • 34 countries with 4 custodians for overseas investment by domestic investors Europe Austria Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Switzerland United Kingdom Belgium Israel Sweden ICSDs Euroclear Clearstream ※KSD’s Custodian Euroclear Clearstream Citibank SSB Asia Australia China(Shanghai) China(Shenzen) Hong Kong Indonesia Japan New Zealand Philippines Singapore Thailand Taiwan Vietnam Americas Argentina Canada Chile Mexico United States Africa & Mid East United Arab Emirates South Africa

7. Global custody service for domestic investors ※Cross-border settlement volume (Bil., USD)

8. STP in KSD's global custody service • STP launched to reduce operational risks and inefficiency by automatic transformation (March 2006) After STP Before STP Low efficiency, High risk High efficiency, Low risk     Clients KSD Custodian Clients KSD Custodian SAFE SAFE Terminal SWIFT STP : Automatic transformation from original message into SWIFT message ⇒ No manual operations Manual operation for data transformation

9. Disintermediation - Local custody service • KSD’s custody service (1998) • - custodian services: securities and cash account opening and management, settlement and • balance report, etc. • - standing proxy services: exercise of voting right and dividend distribution, reports to the • regulator, investment registration to FSS, etc. • Unique model that CSD functions as a local custodian by DISINTERMEDIATION to cross-border investment Foreign Investor Multi-tier structure for foreign investors Global Custodian DISINTERMEDIATION by KSD’s local custody service Local Custodian - Direct access to CSD - Custody a/c as a participant’s a/c and legal ledger KSD

10. Disintermediation - Local custody service • Advantages of KSD’s custody service • - direct access to CSD, custody a/c as a • participant’s a/c and legal ledger • - precise corporate actions by CSD • - stable and firm legal basis as CSD • - reasonable fee • Prerequisite conditions for custody service by CSD • - stipulation by laws or decrees for • cross-border securities deposit and • settlement business by account opening • with foreign CSDs or foreign institutional • organizations • Weakness of KSD’s custody service • - non-commercial banking institution (cash • management or FX not available • directly) • - no global network <Market share of local custody service> • Overcoming the weakness: • - alliance with commercial bank for cash • management and FX

11.  Selling TSE ’ Buying Selling Broker Buying Broker Japan  Data of trading  Application for listing JASDEC Selling broker Buying broker Issuer  Notification of deposit (Migration) Custody agreement Korea KSD JASDEC A/C  Stocks issuing & deposit (through brokers) CSD Linkage • Base of CSD linkage – Local custody service • Co-listing of Korean securities on Tokyo Stock Exchange • - Kodex200 ETF co-listed on KRX and TSE in November, 2007 • - arbitrage trading between Korea and Japan • - STP through SWIFT for migration (1 BUSINESS DAY) • KSD-JASDEC linkage Model

12. Custody service for ADR∙GDR underlying shares • KSD’s Custody Service for Domestic Companies issuing ADR∙GDR(1994) ※ Total custody share • - For domestic companies that issue ADR • or GDR • - Custody agreement • Bank of New York • Citibank N.A. • Deutsche Bank Trust Company • JP Morgan Chase • - Korean companies’ ADR & GDR: 45 issues • for 39 companies • - Market share of KSD in Korea: 100%

13. Custody service for ADR∙GDR underlying shares ※ADR∙GDR conversion and release • Advantages using KSD custody services for ADR∙GDR underlying shares • - book-entry issuance of DR underlying • shares • - direct participation in central deposit • system • - STP through SWIFT for DR conversion • and release(1~2 business days) • - corporate actions such as rights • exercising, tax withholding, etc. through • SWIFT (Mil. Shares) • 1~2 business days for DR conversion and release

14. CSD KSD Transfer Agent KDR Deposi- tary KDR Depositary for foreign companies • Centralized securities depository and settlement system of Korea • ☞ authorized to issue KDR pursuant to the Financial Investment Service and Capital • Market Act of Korea and its Enforcement Decree ※ KSD’s functions at primary market • CSD: securities deposit and • settlement • Transfer Agent for issuance • of foreign shares • Depositary for KDR issuance

15. KDR Depositary for foreign companies • Current foreign candidates for KRX listing • - mostly Chinese and Japanese companies • - Cayman holding companies which have subsidiaries in mainland China • - U.S, Germany, Canadian companies also considering listing to Korean market ※ Foreign Companies’ Listing to Korean Market(2010)

16. KDR Depositary for foreign companies ※KDR Issuance Structure Overseas Korea Securities Report FSS Underwriting Agreement Issuing Co. Lead Manager Subscription Handling Co. Issuance of Underlying Shares Issuance of KDR KDR Distribution Listing Application KRX Custodian Notification of Listing Investors Deposit Agreement KDR Depositary (Primary Market) CSD (Secondary Market) KSD Custody Agreement

17. Expandability of CSD's role in global market • Unique global custody model by expanding its role from domestic securities to global securities, overcoming the limits of a traditional CSD • Possibility and expandability of local custody service by CSD, implementing Disintermediation • Fast and efficient CSD linkage model for the migration between the markets in the case of co-listed companies in the form of shares • Depositary role of CSD in issuing DRs in domestic market as well as 4 major Depositary banks

18. Annex 1. KSD SLB System Increased Efficiency by using the CSD System - Saves time and cost of searching for available securities - Enables effective decision from the price aspect - Quick processing of large volume transactions - Optimizes corporate actions administration Safety of SLB Transactions - Settlement guaranteed by the CSD SLB intermediary - Collateral securities held at CSD account - Daily marking to market of collateral securities Efficient Market Monitoring - Facilitates market monitoring through centralized data management

19. Annex 2. KSD Tri-Party Repo Service Fairness Stability · Offers repo services as a third party · Transactions managed in a dedicated a repo account · Risk reduced by DVP settlement and marking to market Tri-partyRepo Agent (CSD) Tri-partyRepo Agent (CSD) Flexibility Convenience · Offers same level of CA management services as in the deposit system · Allows customers to freely decide transaction conditions such as trade value, term and repo rate · Convenient tax management

20. Annex 3. KSD FundNet Service Efficiency and transparency ensured byimplementing STP for the asset management industry Efficiency and transparency ensured byimplementing STP for the asset management industry Securities company CSD Minimizedsettlement risk Strengthened the role of CSD as a local STP platform Asset management company Trustee Enhanced timely monitoring & compliance functions • The first case in the world a CSD established STP for the entire back-office operations of the asset management market Reduced costs and operational/settlement risk • Globalization of Fund Services - STP through linkages with overseas service providers, Omgeo(2010) - STP for offshore fund distribution by linking with overseas fund platforms

21. Annex 4. Global ETF Market Trend • Global ETFs Market • Korean ETFs Market • Global ETF market has grown steadily since its introduction as an alternative investment instrument in 1990, and Korean ETF market has also grown accordingly

22. Thank You