introduction to securities trading in krx

KOREA EXCHANGE

Introduction to Securities Trading in Korea Exchange

KRX - 2007 - 7

Introduction to Securities Trading in

Korea Exchange

■

Contents

I. Summary

1. Regulations Related to Securities Trading and Order Entrustment 2. Trading Procedures3. The Structure of Electronic Trading System

II. Entrustment System

1. Opening of Account2. Method of Receiving Trade Entrustment 3. Refusal to Accept Entrustment of Orders 4. Good Faith Deposit5. Brokerage Commission

III. Trading System

1. Market Operation2. Trade Execution3. Market Management4. Exceptions to Trading Methods 5. Satisfying the Special Trading Demand6. Liquidity Provider System

IV. Clearing and Settlement System

1. Definition of Clearing and Settlement2. Clearing System of KRX3. Settlement System of KRX4. Management of Settlement Risks

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Korea Exchange I. Summary

6 Introduction to Securities Trading in Korea Exchange

I. Summary

□ Many investors, both the individual and institutional, participate in the Markets operated by the Korea Exchange (KRX), where a variety of investment products changes hand. Therefore, the KRX regulates and standardizes the securities trading to ensure the orderly and fair transaction.

Accordingly, the Securities and Exchange Act (Article 94) stipulated that the business regulations of the KRX must spell out the matters relating to securities trading in its markets.- The Stock Market Business Regulation and the Kosdaq Market Business

Regulation of the KRX stipulate the regulations concerning the entrustment and routing of orders, order matching and trade execution, market operation and clearing and settlement of trade.

The establishment and amendment of the regulations of the KRX require the approval of the Financial Supervisory Commission (FSC), which consults the Minister of the Finance and Economy (Article 115 of the Securities and Exchange Act).

The regulations on entrustment specify the methods and procedures that the securities companies (the members of the KRX) follow when receiving orders from their customers, including the opening of account, order receiving, good faith deposits, and commission fees. The regulations on trading specify the detailed trading methods and procedures adopted in the KRX Markets, including the trading hours, trading day and trade execution methods.

The regulations on market operation specify the matters necessary for operating markets, thus ensuring the establishment of fair market price and reliable transaction. The stipulations on publication of marketprice and market measures such as the ex-dividend and designation asabnormally rising issue are the example of such atters.

1. Regulations Related to Securities Trading and Order Entrustment

A. Introduction

B. Regulations on order entrustment and trading

C. Regulations on market operation

KOREA EXCHANGE

7Summary

The regulations on clearing and settlement spell out the methods of clearing and settlement between the securities companies and their customers and the member securities companies and the KRX, as well as the method of handling the settlement default.

D. Regulations on clearing and settlement of trade

KRX


□Opening of accountsIn order to trade in the KRX Markets, the investors have to first open a trading account with a securities company.

□ Order submission Investors submit their orders to the securities company with whom they have opened the trading accounts, and then the securities companyplaces the quotations for the customer orders in the KRX Markets.

Upon receiving quotations, the KRX trading system matches the quotations according to the established trading principles, and then notifies the results of trade execution to the concerned securitiescompanies. The securities companies, in turn, notify their customers of the trading results.

□ Settlement between the securities companies and the customersAccording to the results of trade execution, the customers must make the payment of the purchase amount and deliver the securities sold tothe securities companies by the settlement deadline.

2. Trading Procedures

A. Opening of accounts and order submission

B. Trade execution and notification of the result thereof

C. Settlement

KOREA EXCHANGE

9Summary

□ The system of securities companies handles the functions relating to receiving of orders from customers, including the account management, order routing, management of securities depository and stock savings.

□ BASE21 system and Systems of securities companies The BASE21 System is the system that the KOSCOM (Korea Securities Computer Corporation) has developed and been operatingon behalf of a group of securities companies that do not operate their own system. Independent systems of securities companies are the system that individual securities company operates independently. * The individual securities companies began to operate their own systems from

November 1996, and as of February 2007, total of 25 securities companies

operates their own system.

The trading systems operated by the Stock Market and Kosdaq Market consist of the front-end system and the trade execution system, andthey handle the tasks relating to the receipt and compilation of quotationsplaced by the securities companies, trade execution, notification of trade results, generation of settlement data, etc.

The information system generates and disseminates various price and market data, including quotation data, information on price fluctuation and market conditions that are useful for making the investment decisions.

3. The Structure of Electronic Trading System

A. Systems of securities companies

B. The KRX trading systems

C. Information system

□ Settlement between the securities companies (the members of the KRX) and the KRX

When the securities companies deliver the purchase amounts and the securities sold to the KRX, the KRX makes the payment or delivers thesold securities to the counter party securities companies.

KRX

KOREA EXCHANGE

D. Other computerized systems

Futures and Options system : The system performing the functions relating to the trading of futures or options contracts (the KRX).Foreign investor management system : The system administering the ceiling placed on the foreign shareholdings (the Financial Supervisory Service).Market surveillance system : The system that monitors the movement of price and trading volumes, as well as the market rumors, thus preventing unfair trading activities (the KRX).


KRX


Korea Exchange II. Entrustment System


II. Entrustment System

(1) Opening of accountWhen intending to submit the orders entrusted by a customer, the concerned securities company (the KRX members) must open a trading account for the customer before placing the quotations on behalf ofthe customer (Article 77 of the Stock Market Business Regulation; Article 33 of the Kosdaq Market Business Regulation). This is to ensure that both the securities company and their customers consent to the details of the service agreement and the customer’s orders are handled in accordance with the conditions spelled out in the agreement.

(2) Purpose of account openingThe purpose is to state the entrustment conditions in writing, thus preventing the disputes that may arise later. It is intended to protect the investors by allowing them to examine the service conditions before entrusting their orders.

(1) Agreement for opening a trading account□ When an investor opens a trading account with a securities company, the

investor is entering into the 「「Agreement for opening a trading account」」with the securities company, which covers the following matters :

The member securities company and the customer open a trading account for the purpose of trading securities in the Markets operated by the KRX; and The customer consents to the details of the agreement.

□ Meanwhile, the securities company is required to keep the written record of customer information such as the name, address and resident identification number, which must be confirmed at the time of opening the account.

1. Opening of Account

A. Introduction

B. How to open an account

KOREA EXCHANGE

13Entrustment System

(2) Service agreement □ The service agreement is a standard agreement that is used when a securities

company and the customer agree to open a trading account. As the securities company enters into the agreement for opening a trading account with many investors, it is difficult to accept different service agreement with each investor. Therefore, a standard serviceagreement is drawn up and used at the time of opening a trading account.

□ The service agreement must include the following matters, which are specified by the KRX, and the securities company may include other matters that it deems necessary :

Matters relating to compliance with the relevant laws and business regulations of the KRX; Matters relating to the priority of quotations placed for the orders received from customers; Matters relating to the securities company’s right to refuse to accept the customers’orders, and the collection of good faith deposit andbrokerage commission; Matters relating to the restriction of discretionary trading and the prohibition of arbitrary trading; and Matters relating to handling of settlement default.

□ Additionally, at the time of opening a trading account, the securities companies are required to explain the main points of the serviceagreement to their customers. In case where the details of serviceagreement are modified, the concerned member securities company isrequired to notify such details to the KRX within 5 trading days they areput into practice.

KRX


When receiving a written order, the member company must used an order slip, which is filled out by the customer and signed or imprinted his/her seal thereon.

When receiving orders over telephone, facsimile, etc., the staff of member securities company who receives the order must confirm that the submitter is the customer himself/herself and prepare an order slipand sign or imprint his/her seal thereon, and keeps the record of order details using such method as tape-recording, etc. for a fixed period. When the computer order slips are stored separately using an electronic device after signing electronically (including the electronicsignature and other equivalent signature), the printed copies may not be kept.

□ Introduction of Home Trading System.The Home Trading System, like the automated trading system, is an order placing system that is essential to build a cyber securities trading system. The Home Trading System was introduced on April 1, 1997, to facilitate the order submission by investors, transmission of quotations bysecurities companies, and confirmation of trade execution and tradedetails, thus improving the efficiency of trading system and enhancingthe convenience of market participants. * The Home Trading System accounted for about 69.9% of total trading

volumes (41.3% of total trading value) in 2006.

□ Order submission using Home Trading SystemTo submit orders through the Home Trading System, a customer must first enter into a contract for use of home trading system with a securities company.

A. Receiving written orders

B. Receiving orders over telephone and facsimile, etc.

C. Receiving orders through electronic communication method

2. Method of Receiving Trade Entrustment

KOREA EXCHANGE


The home trading system can utilize Internet, securities company network, industrial communication network, etc. and an order can be submitted through PC without physically visiting the offices of a securities company.

□ Since the member securities companies have the responsibility to maintainfair and orderly trading system and protect bona fide investors, they are required to refuse to accept the entrustment of unlawful orders such asthe followings :

The orders that breach the Securities and Exchange Act, e.g., the Disgorgement of Short Swing Profits by Insider (Article 188), Prohibition of Practices of Making Use of Undisclosed Information(Article 188-2) and Prohibition of Unfair Trading Such as Price Manipulation, etc. (Article 188-4); The orders that infringe the regulations relating to the restriction of the quotations for short sale and the price limit of quotations for short sale; and. The new orders placed and the request for withdrawal of cash or securities by a customer who has accumulated unsettled balance.

Good faith deposit is a cash or security deposit that a customer makes with a securities company at the time of entrusting orders, to assure the fulfillment of settlement.It is a kind of collateral to be used in case of settlement default, and allowsthe securities company to recover the claims.

3. Refusal to Accept Entrustment of Orders

4. Good Faith Deposit

A. Significance

KRX


In the past, the KRX set the minimum rate that the member securities company must collect as good faith deposit, but on April 1, 1998, the regulation was amended to permit the member companies to self-regulate the rate. By letting the member companies, who are responsible for the trade settlement, to self-regulate the credit of their customers, the KRX responds to the changing environment of global market and make its trading regulations compatible with the global standards. * As of August, 2006, most of the member companies collect 40% of the

entrusted amount as good faith deposit (100% of entrusted amount in case of

administrative or abnormally rising issues) for the buy orders and full entrusted

amount for the sell orders.

To enhance the utility of securities and to allow use of securities instead of cash, the KRX designates certain securities as substitutesecurities, which can be used for margin payments, various guarantee payments and deposit payments, as collateral securities. The securities that can be used as substitute securities include the listed stocks (excluding the administrative issues, issues of investmentcaution in the Kosdaq Market, issues for liquidation trading, issues ofwhich trading is suspended under the criteria for delisting), ETFs, listedbonds (excluding the administrative issues), listed KDRs, stocks andbeneficiary certificates pursuant to the Act on Business of OperatingIndirect Investment and Assets, listed beneficiary certificates issued by the Korea Housing Finance Corporation and Korea Mortgage Corporation.In case of listed stocks, 70% of previous day’s closing price is the value of substitute security, and in case of listed bonds or beneficiary certificates, 70% ~ 95% of base price is the value of substitutesecurity. (Article 88 of the Stock Market Business Regulation; Article 43 of the Kosdaq Market Business Regulation)

B. Self-regulation of good faith deposit rate

C. Substitute securities

KOREA EXCHANGE


□ Current ‘Good Faith Deposit’ account trade causes excessive trading with leverage, increasing short term investment pattern and 'Overdue Amount'. In other words, ‘Good Faith Deposit’ account trade increases daily market volatility and settlement uncertainties.* ‘Overdue Amount’ is the amount paid by securities company if an investor fails

to pay the rest of the amount by the settlement day.

□ To prevent these negative effects, ‘Good Faith Deposit’ rate shall be raised to 100% for 30 days to those investors causing non-settlement, ‘Overdue Amount’, effective from May 1, 2007.

Account with ‘Overdue Amount’ includes non-settlement by the settlement day and also selling of stocks before the settlement day (T+ 2 days) which causes non-settlement.However, exceptions are allowed where ‘Overdue Amount’ is too small (KRW 100 thousands or less) or where ‘Overdue’ is caused by time difference in international transaction.

□ Also, to prevent settlement failures for the issues with low liquidity, when receiving entrustment of order for an issue with 50,000 or less listedshares, the member companies are required to collect all of selling sharesas good faith deposit. * In this case, in case of the securities that the member company is certain about

their entry into the customer’account book by the settlement deadline as a

result of the execution of order in the market, capital increase or right exercise, it

is deemed that the good faith deposit has been collected within the quantity of

concerned securities

D. Execeptions to collection of good faith deposit

KRX

KOREA EXCHANGE


□ The member securities companies collect the brokerage commission from their customers for the orders of which trade has been executed at the time of settlement.

The commission fee is the compensation for the services rendered by the member securities companies in relation to the securities trading.

□ In order to differentiate the services rendered by the securities companies and ease the regulations, the commission fee rate was totally deregulatedon September 1, 1997. However, when intending to establish newcommission fee schedule or revise the existing schedule, for theprotection of the investors, the securities companies are required to makepublic the details of their fee schedule or amendments thereof before itbecomes effective.

The member companies are also required to notify their fee schedules to the KRX within 5 trading days of the implementation (Article 82-2of the Stock Market Business Regulation; Article 51 of the KosdaqMarket Business Regulation).

5. Brokerage Commission

KRX


Korea Exchange III. Trading System


III. Trading System

1. Market Operation

A. Trading hours

B. Trading days

Quotation Receiving Time

Trading Time

Pre-hours trading After-hours trading

7:30 8:00 8:30 9:00 15:00 15:10 18:00

Trading days are from Monday to Friday and the market is closed on the following days and weekend.

Regular Session

▶

▶

▶

▶

▶

▶

◀

◀◀

◀◀

◀

□ The KRX consolidated the morning and afternoon sessions into a single session on May 22, 2000.

□ To enhance the user convenience, the KRX operates the regular session and off-hours session, and to determine the opening price, the quotations are received from 08:00. The off-hours session is divided into the pre-hours session and the after-hours session.

Quotation receiving hours and trading hours

Trading Session Quotation Receiving Hours Trading Hours

Regular Session 8:00 ~ 15:00 9:00 ~ 15:00

Pre-hours Session 7:30 ~ 8:30 7:30 ~ 8:30

After-hours Session 15:00 ~ 18:00 15:10 ~ 18:00

KOREA EXCHANGE

21III. Trading System

The public holidays according to the 『Regulations on Government and Public Offices Holidays』The Labor dayDecember 31 (if it is Sunday or Saturday, the last trading day of the year)Additionally, the days that is deemed necessary for the market management

Trading unit is the minimum amount of securities accepted for trading, which is established to optimize supply and demand in the market. Presently, the trading unit in the Stock Market is 10 shares and in the Kosdaq Market is 1 share. However, for the trading unit of stocks, of which the base price is KRW 50, 000 or higher, is 1 share in the StockMarket. The trading unit in the off-hours session is 1 share.

Quotation price unit is the smallest price unit used in quoting, which is determined by the KRX.

Quotation Price Unit (Unit : KRW)

C. Trading unit

D. Quotation price unit (tick size)

5

10

50

100

500

1,000

5

10

50

100

100

100

Quotation Unit

Stock Market Kosdaq Market

※ Quotation price unit for ETFs is KRW 5 (for the better benchmarking, the quotation price unit was reduced from KRW 10 to KRW 5 on July 18, 2005)

Share Price

less than 5,000

∼ 10,000

∼ 50,000

∼ 100,000

∼ 500,000

500,000 or more

5,000

10,000

50,000

100,000

KRX

□ Order is an intention of trade that the customer expressed to the securities company, and quotation is the bid or ask expression that the member securities company placed in the market to carry out the trade in its name.

(1) Limit orderLimit order is the most common type of order in the market, which specifies the intention to trade at a specified or better price. As it specifies the possible trading price, a bid order can be traded at theprice specified or lower and a ask order can be traded at the price specified or higher.

E.g.) A bid limit order of KRW 10,000 is traded at KRW 10,000 or any price lower, and a ask limit order of KRW 10,000 is traded at KRW 10,000 or any price higher.

Limit order is useful to investors because the order cannot be executed at the prices which are unfavorable than the specified. However, the disadvantage of limit order is that if there is no counter order that satisfies the specified price, the order cannot be executed.* It should be noted that only limit order is permitted for warrants, ELWs, and

beneficiary certificates.

(2) Market order (introduced in the Stock Market on November 25, 1996 and in the Kosdaq Market introduced on July 1, 2002)

Market order is an intention to trade at the best price available or at the price established in the market. Thus, the issue and tradingquantity are specified, but the price is not specified. Market order has the advantage in that it can be executed without delay, i.e., when it is submitted, because it has price flexibility.But, in case where one (bid or ask) side market orders are continually received while there is insufficient order on the other side, there is a danger of sudden price fluctuation. Therefore, the market order is not permitted for the securities that are not subject to the daily price changelimit (e.g., warrants, ELWs, subscription rights, bonds) and the securitieswith low liquidity.


E. Types of order (quotation)

KOREA EXCHANGE


(3) Limit-to-market-on-close order (introduced in the Stock Market on November 25, 1996; in the Kosdaq Market on October 24, 2005)

Limit-to-market-on-close order is the order that is treated as a limit order during the trading session, but converted into the market orderat the beginning of the quotation receiving hours for determination ofthe closing price of the day (10 minutes before the market closing time). Limit-to-market-on-close order make can maintain the function of securing the order price, while providing the flexibility to convert it into a market order if the order is not executed by the market closing, thus safeguarding the liquidity.

(4) Immediately executable limit order (introduced in the Stock Market on January 26, 2004; in the Kosdaq Market on July 26, 2004)

The immediately executable limit order is an order affixing the condition to trade at the best price of counter side orders, thus allowing an immediate execution of an order. For instance, in case of receiving an ask order, the highest bid order price at the time of receipt of the order is the price of immediately executable limit order, and in case of receiving a bid order, the lowest ask order price at the time of receipt of the order is the price of immediately executable limit order.

(5) Best limit order (introduced in the Stock Market on January 26, 2004; in the Kosdaq Market on July 26, 2004)

Best limit order is an order affixing the condition to trade at the best price of the same side orders. For instance, in case of an ask order, the lowest ask order price at the time of receipt of the order is the price of best limit order, and in case of a bid order, the highest bid order price at the time of receipt of the order is the price of best limit order.

(6) Target price order (introduced on May 30, 2005)Target price order is an order specifying the intention to execute the order at a target price such as VWAP (Volume Weighted Average Price), which will be set later on or after the market closing, or at the price close to the target price. A member company that received a target price order can place the quotations after subdividing the order to ensure that the execution of the order at the price close to the target price. The target price order is submitted as either a limit order or market order.

KRX


Target Price Order and Quotation

Investors

Target price order(VWAP)

Condition affixed on Orders (The Stock Market introduced on January 26, 2004; the Kosdaq Market introduced on July 26, 2004)□ To facilitate trading convenience of investors while making it possible to

deploy various investment strategies, the KRX allows affixing of following conditions to the limit order, market order and immediately executablelimit order.

① IOC (Immediate or Cancel)The order requiring that all or part of the order quantity to be executed as soon as the member company places a bid or askquotation, and the quantity not executed to be automatically cancelled.

② FOK (Fill or Kill)The order that requires to cancel the entire quantity, if the entire quantity of the order is not executed immediately after the member company places the quotation. - No condition may be affixed to the limit-to-market-on-close order and best limit orders.

(1) Rationale □ Upper and lower limit on daily stock price change has been set to facilitate

the establishment of fair market price and protect investors from thesudden, drastic fluctuation of stock prices, thus ensuring an orderly trade.

□ However, there is a disadvantage in that the artificial price control may delay the establishment of balanced price, i.e., undermining the price identification function.

F. Price change limit

SecuritiesCompany

KRX

Limit or market

KOREA EXCHANGE


(2) Price change limit in the KRX MarketsPrice change limit in the KRX Markets is ±15% of the base price of the day. This means that no trade can be executed at the price in excessof ±15% of the base price of the day. However, the price change limit is not applied to trading of the issues of liquidation trade, ELWs, subscription warrants and subscription right certificates.

(1) DefinitionBase price is the price used as the basis in determining the price change limits of stocks, ETFs, beneficiary certificates, etc. during the day.

(2) Application of base priceGenerally, the closing price of previous day is used as the base price of the day. However, in case where the closing price cannot be used as the base price, a new base price may be determined. For example: In case where there is a need to make the stock prices consistent before and after the capital increase, stock dividend, share split and facevalue consolidation, the theoretical price computed using the standard formula becomes a base price; andIn such cases as the initial listing and capital reduction, the base price is determined in the market by way of single price auction.

(3) Special quotation priceTo insure that the stock price reflects the market movements even if no trade has been executed, when there are the bid (ask) prices higher(lower) than the base price, the highest bid (lowest ask) price is construedas the closing price of the day and used as the base price of the next trading day.

(1) Purpose Real time quotation information is made public mainly to help the investors in making their investment decisions, while enhancing the services provided by the securities companies and facilitating efficient identification of market price.

G. Base price

H. Dissemination of quotation information

KRX


(2) Range of quotation information published□ During continuous auction

Ten successive best quotes per bid and ask, respectively, the quotation quantities at such prices and the total of such quotation quantities. * Quotations submitted by liquidity providers for ELWs are published separately.

□ During single price auctionThree successive expected best quotation prices and quantities per bid and ask, including the expected matching price and expected matching quantity.

□ Expected matching price is published in real time. During the quotation receiving hours for the determination of opening price, such quotation information is published from 10 minutes after the beginnings of the quotation receiving hour.

Because of the need to execute the trade efficiently at the price most favorable, the competition among the quotations is unavoidable. Accordingly, the established principle is necessary to determine the execution priority among the quotations and the trade is executed in accordance with the following principles:

(1) Price priorityIn case of bid quotations, the quotation with higher price has priority over the quotations with lower prices; and in case of ask quotations, the quotation with lower price has priority over the ones with higher prices.Market quotations have priority over limit quotations. However, because of the application of price change limit, the ask market quotationis construed as having the same priority as the ask limit quotation at thelower price limit and the bid market quotation is construed as having the same priority as the bid limit quotation at the upper price limit.

(2) Time priorityIn case of the quotations at the same price and the market quotations, the quotation received earlier has priority over those received later.

2. Trade Execution

A. Principle of trade execution

KOREA EXCHANGE

□ Examples of order executionAs shown below, quotation ① is executed first in accordance with the price priority.Also, among the quotations at the same price, quotation ②, which was received earlier, is executed before execution of quotation ③ .

Example of Order Matching

※ ①, ② and ③ are the receipt sequence of quotations.


(3) Exceptions to the time priority (Simultaneous Quotations)(a) Exceptional cases

When the opening price is expected to be the upper or lower limit price, the time priority is not applied to the quotations at the upper andlower limit price (including the market quotations) that participated in the determination of the opening price. Such simultaneous quotation system is applied not only to the determination of opening price but also to the determination of first price at the time of trade resumption after the activation of circuitbreakers, system failure and temporary trade suspension due to rumors, etc. However, the simultaneous quotation system is not applied to the determination of the closing price.

(b) Reasons for exceptionsIf trade is executed according to the time priority when the opening price is the upper or lower limit price, the investor who placed an order at the upper or lower price limit, which were submitted later,cannot submit a correction order at more favorable price because ofthe price change limit and the order cannot be executed because of the low time priority given to it. Meantime, if the opening price of the day or the first price determined at the time of trade resumption is not the upper or lower price limit,the investor can submit a correction order at more favorable price and is able to change the priority of the order, thus executing the order.

KRX

Ask Quotes (Quantity) Price Bid Quotes (Quantity)

20,150 10① (Highest Bid)

800, 200 20,100 200②, 300③

100, 100 20,050 20

80③, 100② 20,000 200, 100

20① (Lowest Ask) 19,950

→ In order to meet the demand of investors who wish to execute their orders and ensure the fairness in executing orders at upper or lower pricelimit, the time priority is not applied to the orders placed at upper orlower price limit.

(c) Execution priority of simultaneous quotations ① Customer priority

Since the securities companies conduct both the brokering and dealing, to prevent the conflict of interests and protect the investors,the customer orders have priority over the securities companies’proprietary account dealing.

② Quantity priority □ Among the customer account quotations and among own account

quotations, the quotation with a larger quantity has priority over the quotations with smaller quantities.

□ Quantity allocation method In descending order of quotation quantity, from the largest to the smallest, until the entire quotation quantity is executed.

10 times of trading unit (100shares) → 50 times of trading unit(500shares) → 100 times of trading unit (1,000shares) → 200 times of trading unit(2,000shares) → 1/2 of residual quantity → Entire residual quantity

To give more trading opportunities to the investors with small quantity quotations, the allocation method is broken down into 6 steps (introduced on August 25, 2003).* Before August 25, 2003, the quantity was allocated through 3 steps: 10 times

of trading unit (100shares) → 1/2 of residual quantity → Entire residual quantity.

<Example of Execution of Simultaneous Quotations >

□ In case where the opening price is determined at the upper price limit (KRW 20,150), the quantity of ask quotes are allocated to the bid quotes according to the quantity priority.


KOREA EXCHANGE

Ask Quotes (Quantity) Price (KRW) Bid Quotes (Quantity)


□ Quotations (before the opening price is decided)

4,000

1,500 600

1,700 1,500

1,300 1,000

800

700

(6,100)

(3,200)

(2,300)

(800)

(700)

13,100

20,150

20,100

20,050

20,000

19,950

Total

(16,200)

16,200

Quote ③③

(10,000 shares)

Quote ④④

(5,000 shares)

Quote ①①

(1,000 shares)

Quote ②②

(200 shares)

① 10 times of

trading unit

② 50 times of

trading unit

③ 100 times of

trading unit

④ 200 times of

trading unit

⑤ 1/2 of

remainder

⑥ Remainder

Number of executed shares(13,100)

100

500

1,000

2,000

3,200

800

7,600

100

500

1,000

2,000

700

-

4,300

100

500

400

-

-

-

1,000

100

100

-

-

-

-

200

1,000① 200②10,000③ 5,000④

500 700

400

KRX

※ 13,100 shares of ask quotes need to be allocated to 4 bid quotes at the upper

price limit requesting 16,200 shares.

※ ① and ② are the receipt sequence of quotations.

□ Result of trade execution (at the time of determining the opening price)

※ Allocation begins with the quote with the largest quantity, i.e., quote ③


B. Method of trade execution

□ Status of quotations (after the determination of the opening price)

Ask Quotes (Quantity) Price Bid Quotes (Quantity)

3,000⑤ 1,000⑦ 500⑨ 20,150 2,400③ 700④ 1,000⑥ 500⑧

※ After determining the opening price, the reminder of shares at the upper

limit price is 3,100 (i.e., ③ and ④). Then, the quotations ⑤~⑨ are received

subsequently.

□ Result of trade execution (after the determination of the opening price)⑤-③ 2,400 shares, ⑤-④ 600 shares, ⑦-④ 100 shares, ⑦-⑥ 900 shares, ⑨-⑥ 100 shares, ⑨-⑧ 400 shares ※ Quantity allocation is made to the simultaneous quotes, i.e., up to the quote ④,

but the quotations received thereafter are executed according to the time

priority.

(1) Type of trade execution □ In accordance with the competitive relationship between the supply and

demand, the execution method is grouped as fol lows: Competitive Auction: Trading between many buyers and many sellers.Negotiated Transactions: Trading between one buyer and one seller.One-Way Auction: Trading between a single buyer and many sellers or vise versa.

□ Competitive auction is the most commonly used trading method in Korea.

(2) Competitive auction methods in the KRX Markets(a) Single price call auction (periodic call auction)□ Application time

As shown Table below, the single price auction method is utilized when there is a danger of the stock price being distorted due to the interruption in trading, e.g., the closing of trading session and trade suspension.

KOREA EXCHANGE


- Quotations received from the start

of quotation receiving hour to the

opening of regular-session

- Quotations received during the

first 10 minutes after resuming of

market or trade (depend on the

situations in case of the computer

system failure)

- Quotations received during the last

10 minutes before the market

closing time.

- Quotations received for every 30-

minutes interval after the market

opening

- Quotations received for every 30-

minute interval after opening of

off-hours session.

Application of single price auctionQuotations participating in single

price auction

- When determining the opening

price of the day at the time of

opening of the regular-session

- When determining the opening

price at the time of reopening of

the market after halting the whole

or a part of market

- When determining the first price

at the time of trade resumption

after trade suspension (including

the trade suspension after the

computer system failure)

- When determining the closing

price of the day

- When trading the issues of

liquidation sale

- When determining the price

during off-hours single price

trading

□ Execution method The aggregated quantity of ask quotes and aggregated quantity of bid quotes are matched at “matching price”, and the trade between the matched quotes are executed according to the priority of the quotes. Total quantity of ask quotes at the prices lower than the matching price and the bid quotes at the prices higher than the matching price. At the matching price, total quantity of either ask or bid quote.

□ Example of trade executionAs shown below, subsequent to matching sequentially the highest bid quote with the lowest ask quote, it is found that the largest quantitycan be traded at KRW 15,250. Therefore, trades are executed at that price, and at the matching price of KRW 15,250, the trade is executed according to the time priority.

KRX

□ However, in case of the opening price is determined at the upper or lower price limit, the time priority is not applied (see the Exception totime priority).

Execution Method during Single Price Auction


Ask Price(KRW) Bid

15,400 ●1000

○ ○ 15,350 ● 300

○ ○ ○ 15,300 ● 200 ● 300

○④ ○③ ◑② ●①15,250

●① ●②

2,000 1,000 500 100 100 200

150● 15,200 ○ ○

500● 500● 15,150 ○

500 ● 15,100 ○ ○ ○

150 ● 15,050

※ ○: un-executed quotes ◑: partially executed quotes ●: executed quotes

※ ① and ②, etc. are the order of quotation receipt.

(b) Extension of quotations participating in single price auction (Random End)□ What is random end

Random end is a system that delays the determination of the opening or closing price when the opening or closing price deviates substantiallyfrom the expected price published immediately before the single price auction. Random end system is also applied to the off-hours single price auction.

□ The KRX introduced the random end system to prevent the price distortion caused by the deceptive quotations and to enhance the market transparency and identification of fair and impartial price.

□ Details of Random EndWhen the opening price or closing price varies more than 5% (3% in case of off-hours single price auction) from the expected matching price that is published from 5 minutes before the expected time ofsingle price auction, the determination of the opening or closing price isdelayed up to 5 minutes and the price is determined randomly within that 5 minutes.

○④ ○③ ◑② ●①

2,000 1,000 500 100

KOREA EXCHANGE


The Stock Market tightened the condition for applying the random end on October 30, 2006. That is, the random end is not appliedunless the provisional opening (closing) price rises or falls more than 1% from the most recent market price.

Example of Random End

Expectedmatching price Highest expected price

postponed within 5 minutes

provisional opening price

◀

◀

9:008:55

Lowest expected price

10,500

10,000

9,500

+5%

-5%

※ At 09:00, the provisional opening price is KRW 10,000. And if that price

deviates 1% or more from the base price, the random end is triggered.

During the postponement period, new quotations and correction and cancellation quotations may be placed.

(c) Individual auction at multiple price (Continuous Auction)□ Application time

During the trading sessions where single price auction is not applied, all trade is executed by way of continuous auction.Continuous auction facilitates a speedy trading that utilizes the latest market data. Trading is possible whenever suitable quotes with matching prices are received and the multiple matching prices are continually formed, thus being called “continuous auction”.

□ Execution method Among the competing bid and ask quotes, the trades between the bid and ask quotes that match the price and quantity are continuously executed.

□ Examples of trade executionAs shown below, the bid quotes and ask quotes competes, and when the lowest ask quote and the highest bid quote are matched; the trading is executed at the price of the quote received earlier.

KRX

Ask Price Bid Result of execution

10,600

10,500

②200 10,400

10,300 ①200

③200 10,200

10,100

10,000

9,900

9,800


10,600 ①500

10,500

10,400

10,300

③200 10,200

10,100 ②200

10,000

④200 9,900

9,800

《Example 1》


※ ①∼③ are the receipt sequence of quotations

<1> ①-③ : 200 shares at KRW 10,300

《Example 2》

※ ①∼④ are the receipt sequence of quotations

<1> ①-③ : 200 shares at KRW 10,600

<2> ①-④ : 200 shares at KRW 10,600

KOREA EXCHANGE


10,600 ①100

10,500

10,400 ⑤100

10,300

③200 10,200

10,100 ②200

10,000

④200 9,900

9,800


(1) ConceptThe circuit breakers is a system which suspends the trading for a fixed time to provide a cooling-off period to the investors, when KOSPI or KOSDAQ falls below certain level (10% from the previous day’s closing price). The Stock Market introduced the circuit breakers system on December 7, 1998 and the KOSDAQ Market introduced it on October 15, 2001.

(2) Necessity for circuit breakersIt is a price stabilizing mechanism by pacifying the overreaction in the Markets after the KRX increased the daily price change limit. When stock prices plunge suddenly, influenced by the market sentiment, the investors tend to place orders on one side without a rational consideration, thus increasing the possibility of market failure. For that reason, a price stabilizing mechanism is needed to protect the investors and pacify the Market.

《Example 3》

※ ①∼⑤ are the receipt sequence of quotations

<1> ①-③ : 100 shares at KRW 10,600

<2> ②-④ : 200 shares at KRW 10,100

<3> ③-⑤ : 100 shares at KRW 10,200

3. Market Management

A. Temporary suspension of market (Circuit Breakers)

KRX


(3) Guideline in activation of circuit breakers □ To activate only in case of abrupt drop of stock price index

It is a mechanism to calm down the investor sentiment in case of the sudden price plunge, thus it is not activated when the index soars.

□ To activate only in a special situationFrequent trade suspension increases the uncertainty in the market, thus confusing the investors. Circuit breakers is activated only when there is a possibility of drastic price fall caused by the investor panic subsequent to the sudden drop of stock price index.

□ To close the market as scheduled Closing the market earlier than the scheduled time may cause unexpected losses to some investors, who conduct their trade assuming the normal closure of market. Therefore, the market closes at the scheduled time.

(4) Details of Circuit Breakers System□ Prerequisites for activation

Circuit Breakers is triggered only when KOSPI or KOSDAQ falls at least 10% over the previous day’s closing price and such situation continues at least for 1 minute. Circuit Breakers is triggered only once a day, and it is not triggered during the last 40 minutes before the market closing time.

□ Effect of circuit breakers If circuit breakers is activated, trading of all issues (including the quotation receiving) is suspended for 20 minutes. However, it is possible to place cancellation quotations.Trading of derivatives products that use KOSPI or KOSDAQ as its underlying index is also suspended, but the trading of bonds is not suspended.

□ Termination of circuit breakers (resumption of trade)Trading is resumed 20 minutes after the trade suspension. The first price at the time of trade resumption is determined by way of single price auction after receiving quotations for the first 10 minutes after the trade resumption. Once the first price is determined, the trading is executed by way of the continuous auction.

KOREA EXCHANGE


(1) SpecificsWhen there is a need to bring the corporate information to investors’attention following the rumors, etc. about a listed stock, or normal trading of an issue is not possible due to the influx of excessivequotations, the trading of concerned issue is suspended temporarily to facilitate the reliable trading in the Markets.

(2) Causes of trade suspension□ Cases where the price or trading volume of an issue fluctuates or is

expected to fluctuate drastically in conjunction with the following rumors, etc. :

Examples of Activation of Circuit Breakers

Date

April 17, 2000

(Stock Market)

September 18, 2000

(Stock Market)

September 12, 2001

(Stock Market)

January 23, 2006

(Kosdaq Market)

Reasons for Index Fall

Black Friday in U.S. (Dow and Nasdaq fell

5.56% and 9.67%, respectively)

US markets tumbled; Ford gave up the acquisition

of Deawoo Motors, crude oil price jumped

9.11 terrorist attack on the World Trade Center

US markets tumbled; plunge of theme stocks

B. Trade suspension of individual issue

KRX

Rumors that a check or note issued by a l isted company is dishonored, or banking transaction of a company is suspended or prohibited; Rumors that the business activity is suspended in whole or in part; Rumors about the bankruptcy, dissolution, or filing of an application for commencement of company rehabilitation procedures or de facto commencement of the rehabilitation procedures thereof; Rumors about the adverse opinions, disclaimer opinions or qualified opinion due to the limit placed on the scope of audit in the audit report or the capital impairment of over 50/100; and Rumors about the adverse opinions or disclaimer opinions in the audit review of semiannual report.

□ Case where trade execution is delayed for at least 60 minutes due to the influx of excessive quotations

(3) Resumption of trade□ In case of trade suspension caused by rumors, etc.

Trading is resumed 30 minutes (60 minutes in the Kosdaq Market) after disclosing the inquired disclosure about the cause of trade suspension. However, if the disclosure time is before the opening of the regular-session, trading resumes 30 minutes (60 minutes in the Kosdaq Market) after the opening of regular-session, and if the disclosure time isduring the last 60 minutes (90 minutes in the Kosdaq Market) beforethe closing time of the regular-session, trading resumes on the nexttrading day. In case where the rumors, etc. persist after the inquireddisclosure or the details of inquired disclosure come under the criteria fordelisting or designation as administrative issue, the trade resumption may be postponed.

□ In case of trade suspension caused by excessive quotationsTrade resumption time is determined by taking into account the market conditions, e.g., quotation and trading volumes.

(1) Ex-Dividends□ Definition

Ex-dividend means that the right to receive the dividend of concerned fiscal year’s profit has been expired and it is a market measure taken to notify the investors of the expiration of dividend rights.


C. Ex-dividends and Ex-rights

KOREA EXCHANGE


By taking such measures as ex-dividend, the KRX oversees the rational determination of stock price.

□ Ex-dividend dateThe investors who have purchased the shares become the shareholder after the trade has been settled. As the trade is generally settled on the 3rd day from the trading day, the ex-dividend date is the tradingday before the record date, on which the shareholders entitled todividend are determined.

* If the record date is non-trading day, the previous trading day becomes the

record date.

Also, if the record date falls in the period during which trading is suspended (excluding the first day of trade suspension), the trade resumption day is the ex-dividend date.

12/28 12/29 12/30 12/31 1/1 1/2

Closing pricewith dividend

right

Action day for

Ex-Dividends

Last tradingday

(base day)

Non-tradingday

Holiday Settlement dayfor trade

executions on12/29

□ Base price for ex-dividend issueBase price for ex-dividend issue is re-determined to make the price per share consistent before and after paying the stock dividend.

* Base price for Ex-Dividend Issue =

(2) Ex-rights□ Definition

Ex-right refers the termination of the right to receive the new stocks subsequent to the capital increase, and it is a market measure taken to inform the investors of the termination of subscription rights when a listed company undergoes a capital increase.

(Closing price of cum dividend issue × Number of shares before dividend)

Number of shares after dividend

KRX

□ Ex-rights dateIn common with the ex-dividend date, taking into account the time required for the settlement of trade, the day before the record date for new share allocation becomes the ex-right day. This means that to acquire the subscription rights, the stock should be purchased at least 2 days before the record date for new share allocation.

□ Base price of ex-rights issuesAs a theoretical price that reflects weakening of the closing price of cum ex-right share caused by the capital increase, the base price of ex-rights issue is the adjusted price that ensures the consistency of the share prices before and after the capital increase.

* Payment for capital increase without consideration is deemed to be “0”.

(1) Summary of regulationThe administrative issue is the issue that is likely to come under the criteria for delisting, for such reasons as the worsening business performance, noncompliance with the share distribution requirements or the liquidity dropping below the required level. Designation as administrative issues is a warning notice to the investors that the issue comes under the delisting criteria. At the sametime, by delaying the delisting for a fixed period, the concerned companyis given time during which it can attempt to normalize its business operation.

(2) Trading method for administrative issues.In the past, the trading method of administrative issues was different from that of non-administrative issues, but now the same trading methodis applied to both the administrative and non-administrative issues.

(3) Trading method for issues of liquidation tradeTo give the last opportunity to cash in the shares, the issues to bedelisted are allowed to be traded for 7 trading days.


D. Designation of administrative issues

* Base price for Ex-Rights issue =

[(Closing price of cum rights issue ×Number of shares before capital increase) +

Payment for paid-in capital increase*]

Number of shares after capital increase

KOREA EXCHANGE


During the regular sessions (9:00 ~ 15:00), the issues of liquidation trade are traded by means of single price auction at every 30-minute intervals (13 times a day), and during the off-hours session, they are traded just like normal issues, and the price change limit (excluding the regular session block trading) is not applied.

(1) Summary of regulationsIn case where the price of an issue surges drastically within a short time, such issue is designated as abnormally rising issue to bring thematter to the attention of investors and prevent unfair trading. This isa market measure taken to contain the speculative demands and stabilize sudden rise of price. When designated as abnormally rising issue, new margin trading of such issue is restricted (Article 5-8 of the Regulation on Supervision of Securities Business). It should be noted that most securities companies collect 100% of trading amount as the good faith deposit.

(2) Designation as abnormally rising issues in the Stock Market(a) Designation criteria□ General case (Sudden price jump)

Case where the share price rose 75% or more during the recent 5 days and such situation lasts for 2 consecutive days, and On the basis of the 2nd day, the price gained during the recent 6 days is at least 4 times the gain of the price index of the same industrygroup for the same period.

Designation of Abnormally Rising Issues

E. Designation as abnormally rising issues

Price elevation 75% or more

Price elevation 75% or more

6 previous days’ stock price elevation rate is 4 times of the index of the same industry

T-5day T-4day T-3day T-2day T-1day T-day T+1day T+2day

* Price elevation(%)= ×100Comparative day’s closing price - base day’s closing price

Base day’s closing price

KRX

□ Special case of preferred share (Price deviation from the common share)The preferred stocks may be designated as abnormally rising issue not only because of the sudden price surge, but also because of the price deviation from the common stock.When the closing price of prepared share on the most recent trading day is 1.3 times or more of the price of common share and the price rose at least 30% in the recent 3 days, such preferred issue is designatedas abnormally rising issue. However, in case where the price increase ofpreferred share is less than 1.5 times of the price increase of common share, it is not designated as abnormally rising issue.

Designation of Abnormally

Rising Issues


Preferred stock’s price elevation 30% or more &preferred stock’s price elevation ≥ common stock’s

price elevation 1.5

T-3day T-2day T-1day T-day T+1day

* Price elevation(%) = ×100T day’s closing price - (T - 3day) closing price

(T - 3day) closing price

When a preferred share comes under both criteria, i.e., the general case and the special case of preferred share, it is designate under thespecial case of preferred share. When a preferred stock that has been designated as abnormally rising issue due to the sudden price surge comes under the criteria for the special case of preferred share, it is re-designated under the latter criteria.

(b) Criteria for release from designation as abnormally rising issue □ General case of sudden price jump

The closing price of the day (T+n, n≥4), which is after the 3rd day from the designation day (T+2day), is less than the closing price of 3days ago (T+n-3 day), the issue is released from the designation asabnormally rising issue. However, the closing price of the day is higherthan that of the previous day, the release is postponed.

Closing price of preferred stock > closingprice of common stock 1.3

KOREA EXCHANGE


Also, when 10 days have elapsed from the designation day, the issue is released from the designation on the next day.

□ Special case of preferred share (99. 9. 21) When the closing price of preferred share on the day (T+n day, n≥3), which is after the 3rd day from the designation day (T+1), is less than the closing price of the day before the designation day (T day), theissue is released from the designation. However, if the closing price ofthe day making decision on the release (T+n day, n≥3) is higher thanthat of the previous day (T+n-1 day), the release from the designationis postponed.

T+n day’s closing price < T+n-3 day’s closing price &

T+n day’s closing price ≤previous (T+n-1 day)day’s closing price

T-day T+1day T+2day T+3day T+n day T+n+1day

Designation of Abnormally Rising Issues Release from designation of Abnormally

Rising Issues

T+n day’s closing price < T day’s closing price &

T+n day’s closing price ≤ previous (T+n-1 day)day’s closing price

T-1day Tday T+1day T+2day T+n day T+n+1day

Designation of Abnormally Rising Issues Release from designation of Abnormally

Rising Issues

Also, if the closing price of preferred shares is lower than that of common share, the issue is released from the designation.

(c) Suspension of trading of abnormally rising issues □ In case where the price of preferred share continually rises, after it has

been designated as abnormally rising issue for the reason of the price deviation from that of common share, trading of such issue is suspended.

KRX


□ Criteria for trade suspensionIn case where the price of preferred share on the day (T+n day, n≥3), which is after the 3rd day from the designation day (T+1), rose 20% or more over the closing price of the day before the designation day (T day), trading of such issue is suspended for 3 days. Also, in case where the price of an issue rose 20% or more during the recent 3days, which are after 3 days from the trade resumption day, trading ofsuch issue is suspended. In such case, no limit is placed on the numberof times the trading is suspended.

However, when the closing price of the day when the decision on trade suspension is made (T+n days, n≥3) is lower than that on theday before (T+n-1 day), the trade suspension is postponed becausethere is a possibility that the price of the preferred share drop in future.

Trade suspension

T-1day T day T+1day T+2day T+n day

Designation of Abnormally

Rising Issues

T+n day’s closing price ≥ T day’s closing price 1.2 &

T+n day’s closing price ≥ T+n-1 day’s closing price)

□ Exceptions to trade suspension and trade resumption In case where the closing price of preferred share falls below that of common share, the issue comes under the criteria for delisting or trading is suspended to apply the issue using the opening price as thebase price, the concerned issue is released from the trade suspension. Also, trading of an issue is not suspended when the investment decision is necessary to exercise the rights against the concerned listedcompany.

Price elevation (%) = ×100(T+n day’s) closing price - (T day’s) closing price

T day’s closing price

KOREA EXCHANGE


- For example, when the shareholders have been asked to submit the stock certificates to the concerned listed company in relation to merger and acquisition, etc., trading of concerned issue is not suspended for 2 days,i.e., from 4 days to 2days before the submission deadline of the stock certificates; and

- In case of ex-dividend or ex-rights, trading of concerned issue is not suspended for 2 days, i.e., from 4 days to 2 days before the record date.

(3) Designation of abnormally rising issues in the Kosdaq Market (a) Designation criteria

In case where the price of an issue rose 75% or more during the recent 5 days and such situation lasted for 2 consecutive days; andThe closing price on the 2nd day is the highest among and closing prices of the recent 20 days; and The price gained in the recent 5 days is 4 times or more of the gain of KOSDAQ index in the recent 20 days, such issue is designated as abnormally rising issue.

T-19day T-18day T-5day T-4day Tday T+1day T+2day

Designation of Abnormally Rising Issues

Price elevation 75%or more

Price elevation 75% or more& Recent 20 days priceelevation is 4 time of

Kosdaq index

Highest closing pricein 20 days

* Price elevation(%) = ×100Comparative day’s closing price - base day’s closing price

Base day’s closing price

KRX


(b) Criteria for release from the designation Then the closing price of the day, which is after 3 days from the designation day, has fallen at least 10% from the highest closing price in the recent 5 days or is lower than the closing price of the day beforethe designation day, the concerned issue is released from the designation as abnormally rising issue; and When 10 days have elapsed since the designation day.

(c) Trade suspension of Abnormally Rising Issues□ In case where the price of the preferred share, new share and stock

issued by an investment company continues to deviate from the price of common shares, the price of old common shares or the net asset valueafter it has been designated as abnormally rising issue, the trading of such issue is suspended.

□ Criteria for trade suspension and suspension period ① The first time suspension

In case where a preferred share is designated as abnormally rising issue and its price deviates 2 times or more from the price of commonshares, etc, the trading of such preferred share is suspended for 3 days.

② The second time suspensionIn case where the closing price on the day (T+3+n), which is after 3 days from the day trading is resumed after the first trading suspension,deviates 2 times or more from the closing price of common shares, theprice of old common shares or the net asset value and the price gainin the recent 3 days is 20% or more, the trading of concerned issue is suspended for 3 days.

□ Exceptions to trade suspensionIn relation to the stock splits, capital reduction, spin-off, merger after division and mergers between the listed companies, trading is not suspended for 2 days, i.e., from 4 days to 2 days before the due date of submission of stock certificates of the concerned companies, and incase of ex-dividend and ex-rights, trading of concerned issue is notsuspended for 2 days, i.e., from 4 days to 2 days before the record date.

KOREA EXCHANGE


(1) Definition of program trading(a) Common definition

Program trading generally refers to the computer-driven trading method. That is, the routines such as the market analysis, identification of investment opportunities and order placement are handled by the computer. The investment strategies are devised for a variety of market conditions using the data compiled beforehand and the computer isinstructed to process the orders based on the market analysis made according to such investment strategies.

(b) Definitions according to the KRX regulations□ Index arbitrage trading

Simultaneously buying and selling a basket of KOSPI200 (KOSTAR) constituent stocks and KOSPI200 (KOSTAR) futures or options for the purpose of gaining profits by exploiting the price differences between the basket of KOSPI200 (KOSTAR) constituent stocks and KOSPI200 (KOSTAR) futures and options contracts. Buying a basket of constituent stocks after selling futures or options, or vice versa.There is no prerequisite that the trading time of a basket of constituent stocks and the futures must be the same.

□ Non-arbitrage tradingThe same investor trading 15 or more of constituent stocks of KOSPI (10 or more of constituent stocks of KOSTAR) at the same time.* Before August 28, 2006, non-arbitrage trading was restricted to the constituent

stocks of KOSPI200.

(2) Need to regulate program trading It is possible that program trading may make worse the market instabilitybecause it is based on the technical and mechanical investment strategies about the market movement. For instance, sudden price fluctuation can result from a large amount of sell or buy orders placed atthe same time by the investors who anticipate the same or similar marketconditions, and the price of an individual share may be determined bythe market price trend, independent of the inherent value of the company.

F. Administration of program trading quotations

KRX


Furthermore, in case where the open positions of arbitrage trading is accumulated until the last trading day of the futures & options contracts, there is a risk of sudden price fluctuation on the last tradingday because of the trading to offset the large quantity of open positions.Therefore, program trading needs to be regulated in order to alleviate the sudden price fluctuation caused by the excessive program trading and stabilize the investment sentiment.

(3) Control of program trading quotations(a) Suspension of validity of program trading quotations (Sidecar)□ Summary

Sidecar is a system that temporary suspends the validity of program trading quotations when the market conditions change rapidly, thus lessening the impact of program trading on the market.

□ Criteria for activating sidecar and its effectsSidecar is activated when the price of base contract in the Futures Market deviates 5% or more from the base price of the issue and such situation last at least for 1 minute. In case where the price rises, the validity of bid program quotation is suspended for 5 minutes and in case where the price falls, the validity of ask program quotation is suspended for 5 minutes.

□ Criteria for deactivating SidecarWhen 5 minutes have elapsed since the suspension of validity of program quotation. During the last 40 minutes before the market closing time. In case where circuit breakers was activated during the suspension of validity of program quotation, when the concerned trading is resumed.

(b) Disclosure of program trading quotationsTo make the program trading status transparent, all program quotations are required to be indicated as such (including if it is forarbitrage or non-arbitrage trading) at the time of placing quotations.(Article 12 of the Enforcement Rules of the Stock Market Business Regulation)

KOREA EXCHANGE


(1) Definition □ General definition

Short sale generally means selling the stocks not owned by the seller or settling the trade with the borrowed stocks, not with the stocks owned.

□ Definition according to regulationThe KRX regulation defines the short sale as the selling with the intention of settling the trade with the borrowed stocks, including the casewhere the timely delivery of the sold stocks after the trade is not certain.

(2) Objectives of regulating short sale To secure the reliability of settlement and prevent the disruption in market that may be caused in case of settlement default. To contain the sharp decline of stock price caused by the intensive speculative short sale in a sluggish market and minimize the market impact thereafter.

(3) System of regulating short sale(a) Article 188(1) of the Securities and Exchange Act

Although the Securities and Exchange Act does not regulate the short selling by the retail investors, it prohibits the short selling by the officers and employees of a listed company.

(b) Business Regulations of the KRX□ Restrictions on quotation

Short selling is prohibited except the following cases:

- Cases of selling the stocks deposited with another depository institution or are owned by other means, and the delivery by the settlement deadline has been confirmed by a confirmation letter, etc.

- Cases of selling the stocks borrowed for the margin trading or loan transaction.

- Cases of selling the stocks, within the matching quantity, of which purchase order has been executed on the market, before thesettlement day.

- Cases of selling the stocks before acquiring them after the exercise of the rights of bonds linked to stocks, e.g., bonds with warrants, etc.

G. Regulating short sale

KRX

- Cases of selling ETFs to be delivered as a result of a request for theissuance of new shares or additional creation units or selling of thestocks to be delivered following ETF repurchase request, thus the settlement is certain.

The securities companies are required to collect 100% of trading amount as the good faith deposit for the next 3 months, in case ofreceiving orders from a customer who violated the short saleregulations and failed to settle the trade. However, the securitiescompanies may change the good faith deposit rate, in case where it isjudged that the infringement of the regulation is not intentional or the customer has committed no major offense.

□ Regulation of offer price In case of the selling short that is intended to be settled with borrowed stocks, in principle, it is prohibited to place a quotation of which the offer price is lower than the most recent market price.However, in case of short selling of ETFs, index arbitrage trading, stock arbitrage trading and ETF arbitrage trading, the offer price is not regulated.

(c) Other regulations relating to short sale When receiving an short sale order and placing a quotation, the concerned member company is required to indicate on the order slip and quotation slip that the quotation is for short sale (Article 12 and108 of the Enforcement Rules of the Stock Market Business Regulation;Article 18 of the Enforcement Rules of the Kosdaq Market BusinessRegulation). The securities companies may refuse to accept theentrustment of order that infringes the regulations (Article 84 of the Stock Market Business Regulation; Article 40 of the Kosdaq Market Business Regulation). Also, when it is necessary for the market management, the KRX may request the securities companies to submit the information relevant to short sale (quantity, price, date and customer name, etc.) (Article 17 ofthe Stock Market Business Regulation; Article 9-2 of the Kosdaq Market Business Regulation).


KOREA EXCHANGE


(1) Method of determining the base price of initially listed shares, etc. The base price of initially listed share is the first trading price determined by the quotations, which are within the specified pricerange, received during the quotation receiving hours (08:00 ~ 09:00). The price range of quotations participating in the determination of first trading price (base price) is from 90% (50% in case of preferred shares) to 200% of appraisal price. However, in case where the netasset value per share is the appraisal price, the quotation price range is from 50% to 200% of appraisal price. Once the base price is determined, the issue is traded in accordance with the trading method used for other listed issues, within the upper and lower price range determined on the basis of the base price. Similarly, in cases of the relisting, capital reduction, initial listing of preferred shares, the first trading price determined after receiving thequotations, which are within specified price range based on the appraisal price, is deemed the base price.

(2) Definition of appraisal price and reasons for establishment□ The definition of appraisal price

Appraisal price is a price used as a base in setting the quotation price range at the time of determining the first trading prices of initially listed shares, etc., which is established to prevent the price distortion caused by the participation of quotations with abnormal prices.

□ Reasons for establishing appraisal price Appraisal price is established because of the need to prevent the market disturbance that may result when the first trading pricedeviates significantly from the acceptable price due to the participation ofabnormal quotations. Thus, use of the appraisal price is necessary to prevent the participation of the quotations with abnormal prices, which mayundermine the establishment of fair price and negotiability of the share, in the determination of the first trading price.

4. Exceptions to Trading Methods

A. Determination method for the first trading price of initially listed issue, etc.

KRX

(3) Criteria for determination of appraisal price If a concerned issue has already been appraised by the investors (e.g., the public offering price, the closing price in the Kosdaq Market), such issuing price or the closing price is the appraisal price, and when the issuing company underwent a structural change (e.g., spin-off,merger), the theoretical price is the appraisal price. In case wherethere is no objective appraisal standard, the net asset value per share is used as the appraisal price of the concerned issue.

(1) Summary of regulations relating to acquisition of treasury stocks □ Definition

Treasury stock means the stock reacquired and held by the issuing company. Although the Commercial Act permits the acquisition of treasury stocks only in an exceptional case, the Securities and Exchange Act generally allows the acquisition of treasury stocks by the listed companies.

□Objectives of purchasing treasury stocksThrough the purchase of treasury stocks, the listed companies can improve the supply and demand condition and create the expectation for higher dividend, and by reducing the negotiable shares, it is possible to stabilize the stock price. Also, the treasury stocks are acquired to defend against a hostile takeover, or to award the employees or grant the stock options.

□ Legal purchasing limits The Commercial Act prohibits the purchase of treasury stocks, except for the purpose of stock retirement, merger, transfer of business,exercise of right, handling of fractional shares, and execution of stock repurchase claim (Article 341). However, the Securities and Exchange Act eases the restriction by not stipulating the reasons for purchase. Nonetheless, the Act regulates the source of purchase funds and purchase method since the acquisitionof treasury stocks can damage the capital adequacy. (Article 189-2)


B. System of trading treasury stocks

KOREA EXCHANGE

(2) Regulations on treasury stock purchasing

Principles Applied to Treasury Stock Purchase

- To prevent purchase of treasury stocks from a special person outside the KRX market, while ensuring the participation of retail investors through the KRX market or tender offer.

- To preclude the acquisition of treasury stocks by the ineligible company through the strict control of financial resources used for acquisition.

- To make the acquisition procedures transparent by requiring to observe the established procedures, including the submission of reporton the acquisition of treasury stocks (tender offer) and disclosure of such report.

□ Limitation on purchasing quantityCurrently, there is no limit on the purchasing quantity, i .e., theoretically, a listed company can purchase all negotiable shares, provided that it has sufficient funds to do so.

□ Purchasing fund (Article 116 of the Regulation on Securities Issuance and Disclosure of the FSC)

The amount that can be used for the purchase of treasury stocks is calculated by adding/subtracting the aggregated acquisition/disposal amount (including the treasury stock trust contracts entered into orterminated) since the end of previous fiscal year and the profitdividend amount determined at the general shareholders’meetingto/from the maximum dividend amount according to the Commercial Act, that is stated in the financial statement at the end of the previous fiscal year. In case of purchasing treasury stock for profit retirements, the amount is calculated by subtracting the revaluation reserve, corporate developmentreserve, corporate rationalization reserve, corporate structure improvementreserve, and the contract amount, if any treasury stock trust contracts exits,from the profit available for dividend according to the Commercial Act,which is stated in the balance sheet at the end of the concerned fiscal year.

□ Purchasing method (Article 189-2 of the Securities and Exchange Act)Treasury stocks can be purchased in the KRX Markets or through over-the-counter market by way of the tender offers.In addition, indirect acquisition by way of the treasury stock trust contract is possible.


KRX


□ Purchasing (Disposal) procedures (Article 84-3 of the Enforcement Decree of the Securities and Exchange Act)

When intending to purchase (dispose) the treasury stocks, the concerned company is required to submit a report on acquisition(disposal) of treasury stocks to the FSC and the KRX, and the purchase(disposal) period is for 3 months counting from the 3 days (1 day) after submission of the report on acquisition (disposal).

- When intending to dispose the treasury stocks using two or more regular session and off-hours block trading methods, it is required tostate the quantity and type of stocks to be disposed by each methodin the report on disposal. (Article 114(1) of the Regulation on Securities Issuance and Disclosure)

(3) Treasury stock trading method(a) Reasons for regulating the trading method

In case of trading the treasury stocks in the KRX Market, it is difficult to entirely eliminate all possibilities of market impacts such as the sudden price fluctuation and unfair trading such as the use of inside information. Therefore, to avert the possibility of being used as ameans of price manipulation or insider trading, the method of trading the treasury stocks is strictly regulated.

(b) Treasury stock trading method□ Opening a treasury stock trading account

In order to trade the treasury stocks, the listed companies are required to open a separate account for trading treasury stocks with a securities company. No other issues, except the treasury stocks, can be traded through the account for treasury stocks trading.

□ Trading proceduresThe member securities companies are required to submit to the KRX the report on trading of treasury stocks within 1 hour after the market closing on the day before the purchase. New quotations may be placed during the trading hours (introduced on December 1, 2003), but no new quotation and correction quotationscan be placed during the last 30 minutes before the market closing time.

KOREA EXCHANGE

Maximum order quantity per day is, within 1% of total number of stocks issued, the higher quantity between 10 % of the acquisition(disposal) quantity reported and 25% of average daily trading volume during the most recent 1 month.

□ Trading of treasury stock by way of trust contractsThe trading of treasury stocks by entering into a trust contract was not regulated in the past, but since December 1, 2003, it is regulated in the same way as the direct purchase (disposal) by a listed company. However, considering the nature of the trust contract, the daily quantity limit is set to 1% of the total number of shares issued. Also, to prevent the frequent acquisition (disposal) of treasury stocks using trust contracts, the disposal (acquisition) within 1 month of acquisition (disposal) [on the basis of the most recent acquisition(disposal)] is prohibited.


Price range

Quotation

receiving hoursBid Ask

Pre-hours

quotations

Regular-session

quotations

- Price between the previous day’s closing price and the price thatis 5% higher than that closing price

- Price between the previous day’s closing price andthe price that is 2quotation price units lowerthan that closing price

- Upper limit : The higher price of the day’s highestprice or highest bid price

- Lower limit : The price that is 10 quotation price units lower than thehigher price between themost recent market priceand the highest bid price

- Price between the lower price out of the most recentmarket price and thelowest offer price, and theprice that is 10 quotationprice units higher thansuch lower price

KRX

(c) Trading of treasury stocks using off-hours block trading.In case of disposing the treasury stocks using the off-hours block trading method, the price range was strictly regulated between theclosing price and the price at 2 quotation price units lower than theclosing price. However, to facilitate efficient disposal of the treasurystocks, this regulation was revised on October 30, 2006, allowing ±5% of the closing price of the day (in case of the pre-hours block trading, the closing price of the previous day). The treasury stocks can be purchased using the off-hours block trading method only in the case of acquiring the treasury stocks fromthe government or in the case where the government has advised and the FSC has permitted the acquisition. - Purchasing price range is the same as the one applied to other off-

hours block trading. However, in case of acquisition from thegovernment or the Korea Deposit Insurance Corporation oracquisition according to the approval of the FSC, no price restriction (including the price limit) is applied.

Unlike trading during the regular session, the daily quantity limit is not applied, but the submission of the report on acquisition (disposal) of treasury stocks is required by the day before the trading.

(d) Exceptions in acquisition of treasury stock In case of sudden change in the market condition, to protect the investors and stabilize the market, the KRX may make an exception in allowing the trading of treasury stocks after obtaining the permission from the FSC. When exception was made, the trading of treasury stocks is possible up to the daily quantity limit that is within the acquisition quantity reported. * Period when the exception was applied: September 21, 2001 ~ March 29, 2002

(1) DefinitionIn response to the growing demand for the block trading in the regular session, the regular session block trading was introduced. The


5. Satisfying the Special Trading Demand

A. Regular session block trading (basket trading)

KOREA EXCHANGE

system intends to improve the quality of market through the reliable market operation by preventing the sudden price fluctuation. It also enhancesthe convenience of investors by expanding the block trading hours. Regular-session block and basket trading are the trading methods, in which the KRX executes the quotation placed by a member securities company against an order or a coupled order for an individual share or basket of stocks, that meets certain criteria. The Stock Market has introduced the regular session block trading and regular session basket trading, and the Kosdaq Market has introduced the regular session block trading. The ‘K-BloX’system is used for the order placementand trade execution. Although the identification of counter party andnegotiation of trading conditions are normally done outside the KRX market, the ‘K-BloX’can be used for those purposes.

(2) Trading method


Details

Issues eligible for

trading

- Stocks, DRs, ETFs(excluding the issues that has no trading record in the regular session)

Trading Time - Regular session (09:00 ~ 15:00)

Price Range- Within the highest and lowest market price of the day, which is established before the quotation placement

Order Types- Coupled order for which the details of bid and ask

match up Order Quantity

Order Quantity

- Block trading :Stock Market : Order quantity at least 500 times of trading unit or the trading amount of KRW 100 million or more Kosdaq Market : Trading amount of KRW 100 million or more

- Basket trading : A basket of 5 stocks or more, with the trading amount of KRW 1 billion or more

Execution Price - At the price negotiated between the buyer and seller

Change, Cancellation - Change or cancellation of quotation is possible before the execution

Trade Unit - 1share

Number of Members- Either buying or selling party has to be a single

member

KRX

(1) Off-hours trading□ Definition

Off-hours trading refers to the method of executing a trade among the quotations received during a fixed period after closing or beforeopening the regular session. The off-hours trading is classified into theoff-hours closing price trading, off-hours block trading and off-hours basket trading and off-hours single price auction trading. To provide a trading opportunity to the investors who missed the trading opportunity during the regular session, trading sessions are opened before or after the regular session. Off-hours trading also provides the trading opportunity to the orders that are difficult toexecute by way of the auction method. The securities eligible for off-hours trading are stocks, DRs and ETFs.

□ Off-hours trading


B. Off-hours trading System

TradingHours

QuotationReceiving

Hours

Trading Types

Pre-hoursSession 07:30~08:30 07:30~08:30

Off-hours closing price trading; Off-hours block trading; Off-hours basket trading

After-hours

Session

15:10~15:30 15:00~15:30

15:30~18:00 15:30~18:00

15:10~18:00 15:00~18:00

Off-hours closing price trading

Off-hours single price auction

trading

Off-hours block trading;

Off-hours basket trading

※ Off-hours basket trading is not yet introduced in the Kosdaq Market.

KOREA EXCHANGE

(2) Off-hours closing price trading□ Definition

It refers to the method that executes the orders that are received during a fixed period after the closing of the regular session at theclosing price of the day. * During the pre-hours session, the orders are executed at the closing price of

the previous day.

This method is introduced mainly to accommodate the investors who wish to execute the orders that were not executed during the regular session.

□ Trading method

(3) Off-hours single price auction trading□ Definition

Off-hours single price auction trading is the method of executing trade by means of the single price auction at every 30-minute intervals after the closing of the regular session. It was introduced on May 30, 2005to reinstate the functions of the ECN, when the ECN closed down its operation.


Details

Issues eligible fortrading

- All listed securities(excluding those have no record of execution in the regular session)

Execution Price- The closing price of the day (in case of pre-hours

trading, the previous day’s closing price)

Execution method- Bid and ask quotations are matched according to

the time priority

Change, Cancellation- Change or cancellation of quotation is possible

before the execution

Trading Unit - 1share

KRX

□ Trading method

(4) Off-hours block and basket trading□ Definition

Off-hours block or bask trading refers to the method of executing the coupled orders with a large quantity, which are submitted for an individual issue or basket of stocks, during the off-hours trading session. Off-hours block trading was introduced to complement the shortcomings of the reported block trading system that can be executed only at the opening or closing price, and it is intended toassist the institutional investors who trade many stocks in a large quantity for the management and creation of investment portfolios.

□ Trading method

Details


- All listed issues(excluding those that do not have a record of trade execution during the regular session)

Execution Price- Price that is within ±5% of the closing price of the

day, which must be within the price limit of the day

Price Matching Method- Single price auction at every 30-minute interval

from 15:30 to 18:00 (total of 5 times)

Change, Cancellation - Change or cancellation of quotation is possible before the execution

Trading Unit - 1share


Details


- All listed issues (excluding those have no trading record during the regular session)

Price Range - Within the price change limits of the day

Order Types - Coupled order with the matching details

Order Quantity

- Off-hours block tradingStock Market : Order quantity at least 500 times of trading unit or order amount at least KRW 100 millionKosdaq Market : Order amount at least KRW 100 million

- Off-hours basket trading: A basket of 5 stocks or more with trading amount of KRW 1 billion or more

Execution Price - At the price negotiated by both parties

Change, Cancellation- Change or cancellation of quotation is possible

before the executionTrading Unit

Number of Members

- 1share

- Either the buying or selling party is a single member

KOREA EXCHANGE

(1) Definition□ Liquidity Provider system is the system where the securities company,

which entered into a liquidity provision agreement with the issuer ofsecurity with poor liquidity, continuously places bid and ask quotes tofacilitate the establishment of a stable price.

Under the liquidity provision agreement, the LP is obliged to place bid and ask quotes, but is compensated for the service and receives commission from the listed company with whom the agreement is entered. In case where the spread between the bid and ask quotes is higher than certain ratio, the LP places quotations that are aimed to reduce the spread and responds to the orders placed by investors. * Currently, the LP services are available for the stocks, ETFs and ELWs in the

Stock Market and ETFs in the Kosdaq Market.

(2) Expected effects□ Stimulation of order placing with the increase in trading volume (liquidity

providing quotations) Possible breakaway from the ‘vicious circle of low liquidity’, which are caused by investors avoiding the issues with low liquidity.

□ Provision of a comprehensive financial service by LP The LP can provide the services such as the business analysis and research, support for the IR and public relations, leading the corporate financing (e.g., paid-in capital increase), etc.


6. Liquidity Provider System

A. Liquidity Provider (LP)

KRX

□ Qualifications of LPClearing members with a license for self-account transaction. Appointment of employee who is responsible for the tasks concerning the liquidity provision. In case where a LP has received the lowest grade for 3 consecutive times in the LP performance assessment, at least 1 year has beenelapsed since receiving the result of the most recent assessment.

□Obligation of LPBid and ask spread : If the spread between the best bid and best ask quotations is more than 3%*, both the bid and ask quotes must be submitted within 5 minutes of such occurrence, so that the spread would be reduced. * The LP and the listed company decide the spread ratio, but it should

be less than 3%. Minimum quotation quantity : 5 times of trading unit. * The LPs and the listed company decide the amount, but it should be at least 5

times the trading unit.

Exemption from submitting liquidity providing quotations ① In case where the spread between the best bid and the best ask

quotations is less than 3%.② During the quotation receiving hours for single price auction and

during 5 minutes immediately after closing of the concerned singleprice auction.

③ In case where LP’s holding amount dropped below the quotation unit.④ In case where LP’s trading volume has exceeded a fixed amount

(specified in the agreement).⑤ In case where the KRX deems the exemption is necessary for the

market management. □ Quotation submission method by LP

When the situation requiring the submission of liquidity providing quotation occurs, the LP first places either bid or ask quotation, and then places the other side quotation. - The price of quotation placed first must be between the bid and ask

quotations (it is possible to place the ask quote at the best ask priceand bid quote at the best bid price); and


B. Details of LP system

KOREA EXCHANGE

- The price of quotation submitted later must be within ±3% of the price of quotation submitted first.

If ask quotation was submitted first


AskPrice

Bid(KRW)

Ask Price

Bid(KRW)

*Best ask quotation is KRW 10,400

and best bid quotation is KRW 10,000,

thus the spread ratio exceeds 3% and

the LP is obliged to place quotations.

*The LP can place an ask quote at the

price between the best ask price (KRW

10,400) and the best bid price plus 1

quotation unit (KRW 10,050).

∼ ∼

(LP) 50

100 100

100100

*If the LP has placed an ask quote at

KRW 10,200 first, it may place a bid

quote at the price between the best

ask price minus 1 quotation unit

(KRW 10,150) and the price that is 3%

below the best ask price (KRW 9,900).

AskQuotation

Range Bid Quotation

Range

10,450

10,400

10,350

10,300

10,250

10,200

10,150

10,100

10,050

10,000

9,900

10,450

10,400

10,350

10,300

10,250

10,200

10,150

10,100

10,050

10,000

9,900

KRX

If bid quotation was submitted first

Thus, the liquidity providing quotations cannot be matched with the quotations that were received beforehand, and are matched only with the quotations received later than the liquidity providing quotations.

10,450

10,400

10,350

10,300

10,250

10,200

10,150

10,100

10,050

10,000

9,900


*Best ask quotation is KRW 10,400 and

best bid quotation is KRW 10,000,

thus the spread ratio exceeds 3% and

the LP is required to place liquidity

providing quotations.

*The LP can place an bid quote at the

price that is between the best bid price

(KRW 10,000) and the best ask price

minus 1 quotation unit (KRW 10,350).

* If a bid quote at KRW 10,050 is

submitted first, the LP may place an ask

quote at the price between the best bid

price plus 1 quotation unit (KRW

10,100) and the price that is 3% higher

than the best bid price (KRW 10,350).

AskPrice

Bid(KRW)

Ask Price

Bid(KRW)

∼ ∼

100 100

100100

Bid Quotation

Range

Ask Quotation

Range

(LP) 50

10,450

10,400

10,350

10,300

10,250

10,200

10,150

10,100

10,050

10,000

9,900

KOREA EXCHANGE

□ Supervision and management

Liquidity providing quotations can be submitted only through the special account that the securities company established for thatpurpose, and the regular monitoring is carried out to insure the fair trading practice and the compliance with the obligations of LP.

□ Assessment of LP performance Performance of LPs is assessed every quarter, while examining such aspects as the degree of compliance with the LP’s obligations, the amount of contribution made in improving the quotation spread, thekeenness in submitting the liquidity providing quotations, etc., If a LP receives the lowest grade for the 3 consecutive quarters, such LP is banned to become a LP for a period of one year.

□ Reporting requirements When entering into a new liquidity provision agreement or changing the important details of the existing agreement, the concerned LP isrequired to notify such fact and details to the KRX within 3 business days. The fact about the appointment or change of the staff responsible for liquidity provision or other information required for the assessment of LP performance should also be reported.


KRX


Korea Exchange IV. Clearing and Settlement System


IV.Clearing and Settlement System

1. Definition of Clearing and Settlement

A. Definitions

□ General meaning of settlement is the termination of trading contract by the seller fulfilling the obligation of transferring the ownership rights ofsold securities and the buyer fulfilling the obligation of making thepurchase payment.

□ Characteristics of settlement in a securities marketIn a securities market, the securities change hands anonymously, in groups, in bulk and repeatedly. If trades are settled using general settlement method, the market participants have to raise a largeamount of cash and stocks for the settlement and have to payenormous amount of fees for the sett lement operat ions.Consequently, it can create a doubt about the secure and reliable settlement. Furthermore, in case of a settlement failure, it is difficult to bring a series of multilateral trades to a conclusion. Hence, a highly coordinated and standardized settlement and risk management methods are required to facilitate timely and speedy settlement, which is the fundamental requirement of a securities market, and as the market operator, the exchanges establish andoperate the clearing and settlement system, including the system of handling the default.

□ Clearing is a series of processes that a Central CounterParty (CCP), that assumes the accountability of buyer to all sellers and the accountability of seller to all buyers, performs to guarantee the settlement by netting the credits and liabilities between the sellers and the buyers (between the member securities companies and the CCP) and to instructing the settlement agency to settle.

Accordingly, if a member company fails to settle a trade, the CCP discharges the settlement obligations in accordance with the laws and regulations (announcement of default, action against the failed member,injection of funds for settlement, taking the responsibility for final settlement).

B. Clearing

KOREA EXCHANGE

Broad sense of settlement = Broad sense of clearing

Clearing function (narrow definition) Settlement function (narrow definition)

- To reciprocate the trade (novation, acceptance of liability, open offer)

- To receive the trading details - To perform the function of validating the trading details

- To take the custody of good faith deposits and substitute securities

- To transmit the settlement instruction

□ The KRX as the CCP The Securities and Exchange Act contains the provisions that allow the KRX to effectively perform the functions of CCP. For instance, it states that the KRX stipulates the settlement methods in its businessregulations (Article 95); the member securities companies contribute tothe Joint Compensation Fund (Article 96); the KRX may appropriatemembers’deposits and guarantee funds for the settlement of theliabilities of members (Article 97); and the KRX has a right to be paidin preference to any other creditors with respect to the money or securities paid for the settlement (Article 99).The ground to assume the credits and liabilities of member companies that were incurred from the trading in the KRX Markets is stipulated in the KRX’s Membership Regulation (Article 21), the Stock MarketBusiness Regulation (Article 73) and the KOSDAQ Market Business Regulation (Article 29).

□ Settlement refers to the termination of trade as a result of the CCP and the member companies fulfilling the credits and liabilities obligations that are determined by the clearing processes.

Definition of Clearing and Settlement

69IV. Clearing and Settlement System

C. Settlement

- To deliver the settlement securities - To pay the settlement cash

KRX


□‘Settlement’and ‘settlement process’As the settlement means the fulfillment of credit and liability obligations, the ‘settling parties’are the CCP and the membersecurities companies.However, the fulfillment of obligations among the trading parties is carried out through the depository institutions (for book-entry transfer of securities) and banks (for wire transfer of cash payment), thus theactual settlement process is carried out through the depository institutions and banks.

Clearing and Settlement Procedures in the KRX Markets

KOREA EXCHANGE

① Trade matching Trading details are verified by the trading parties after the execution of trades. In addition, the KRX trading system checks the trading details at the time when the trade is executed (Locked-in Trade). Currently, the KRX notifies the trading details to the concerned member companies in real time.

② Correction of trading errors and confirmation of member positionIn case where the KRX made an error in the course of executing trade or an error occurred in the course of placing a quotation by a member company, the KRX corrects such error. To correct an error made by the member companies, the concerned company must notify the KRX soon after the error was made, and the position (net credits and net liabilities) of the member is determined after the KRX corrected the errors reported.

③ Assumption of liabilities The settlement is carried by way of the KRX assuming the liabilities of a clearing member resulted from the trading in its Markets, and inturn, the concerned clearing member assumes the same liability that the KRX has assumed. The clearing member, in accordance with the settlement entrustment agreement entered into pursuant to the KRX’s Membership Regulation (Article 22), assumes the rights and obligations of non-clearing member with regard to the settlement of the trades, and at thesame time, the non-clearing member assumes for the clearing memberthe same rights and obligations that the clearing member has assumed.

④ Determination of the settlement securities and settlement payment by netting The amount of securities to be delivered is determined by netting the selling quantity and buying quantity per issue per member company,and the payment amount is determined by netting the selling amountand buying amount per member.


2. Clearing System of KRX

A. Clearing under normal situation

KRX


It should be noted that the amount of settlement payment is determined by netting the total sales amount and total purchaseamount of a concerned clearing member in the Stock Market and the Kosdaq Market.

⑤ Notification of settlement details and instruction When the amounts of settlement securities and settlement payment are determined, the KRX notifies such details to the clearing members and the Korea Securities Depository. The clearing members are required to make the payment of cash and delivery of the settlement securities by the settlement deadline (16:00), and the KRX transfers the cash and delivers the securities to the concerned clearing members after the settlement deadline. Under the authorization of the KRX, the Korea Securities Depository carries out the settlement operation, i.e., the book-entry transfer of the delivered securities and cash payment.

⑥ Confirmation of fulfillment of settlementsThe settlement is completed when the settlement payments have been entered in the account of the net selling member and the settlement securities have been entered in the account of net buying member. The Korea Securities Depository shall report the status of settlement to the KRX, when the settlement is completed.

① Declaration of default In case where a clearing member has failed to settle the trades or there is a possibility of not settling the trades by the settlementdeadline, the KRX may suspend the concerned clearing member fromtrading for a fixed period and hold back all or a part of the salesamount and purchased securities due to that concerned clearing member.

② Termination of trade, consolidation of unsettled trades, and close-out nettingThe KRX is required to bring to a conclusion all trades conducted by a member company who has been suspended from trading or lost its trading privilege.

B. Clearing in case of settlement default

KOREA EXCHANGE

In case of defaulting on the settlement of Repo trade, the KRX treats all trades with a same counterparty as a single agreement, and substitutes the settlement with a single payment to the counterparty of thedefaulted party, of the amount equivalent to the total repurchase price,the purchased bonds and the variation margins, which must be paidand returned by the defaulted party, after the settlement deadline on the repurchase date (Close-out Netting).

③ Discharge of unsettled obligations of the defaulted member In case where a clearing member defaulted on the obligations arising from the securities trading in the KRX Markets, the cash and securities such as the member’s deposit, guarantee fund and contribution to theJoint Compensation Fund, which the defaulting clearing memberdeposited with the KRX, are appropriated to compensate the damages caused.In case where the deposit of the defaulting member is insufficient to compensate the damage caused by the default, the KRX appropriatesthe contributions of other members to the Joint Compensation Fund.In this case, the amount borne by other clearing members is proportional to the amount each member contributed.If the Joint Compensation Fund is not enough to cover all damages, the KRX uses its own assets such as the settlement reserve.

④ Exercise of the right of indemnity against the member who defaulted on settlement

The KRX is liable to compensate for the loss caused by the defaulting member companies.In case where the KRX has compensated the damage caused by the member company’s default, the KRX has a right of indemnity over theamount compensated and the expenses incurred against the defaulting member company. With regard to the cash and securities paid for the settlement, the KRX has a right to be preferentially treated over other creditors.

⑤ Reporting to the FSCWhen the KRX has compensated the damages caused by the member company’s default, the KRX is required to report such facts to the FSC.


KRX


□ The delivery of settlement securities is carried out through the book-entry transfer system that is operated by the Korea Securities Depository,without the physical delivery between the KRX and the membersecurities companies.

□ Payment of settlement amount is carried out through the book-entry transfer system that is operated by the Bank of Korea and othercommercial banks*. *Currently, the settlement bank for the government bond market is the Bank of

Korea and the settlement banks of other markets are the commercial banks such

as the Shinhan Bank and Woori Bank.

□ Under the authorization of the KRX, the Korea Securities Depository operates the book entry transfer system for the delivery of settlement securities and receipt of settlement payment.

Thus, the Korea Securities Depository reports to the KRX the settlement status.

□ The KRX is liable to compensate any damage caused due to the defaultby the member securities companies. To compensate the damage caused,the KRX first appropriates the Joint Compensation Fund, and if the JointCompensation Fund is not sufficient to cover the damage, the KRX uses its own assets.

3. Settlement System of KRX

A. Book-entry transfer of settlement securities

B. Book-entry transfer of settlement payment

C. Reporting the results of settlements

4. Management of Settlement Risks

A. Settlement obligation of KRX

KOREA EXCHANGE

□ Accumulation and Management of Joint Compensation Fund.Joint Compensation Fund is a reserve fund, to which the clearing member companies contribute, accumulated to compensate the damages resulted from the defaulting the trade contract by a clearingmember. Within the limit of the fund, the clearing members are jointly liable for the damages caused by the default. Joint Compensation Fund is accumulated up to KRW 100 billion, for each of the cash and derivatives market, and the funds for cash market and derivatives market are managed separately. Furthermore, the Joint Compensation Fund is managed separately from the KRX’s ownassets and invested in the safe assets such as the treasury bonds. Amount that each member contributes to the Joint Compensation Fund has 2 components, i.e., the basic contribution and the intermittentcontribution calculated on the basis of the trading value of the concernedmember. The contribution amount per member is calculated eachquarter and the members are required to make up (or refunded) thedifference from the contribution already made within 20 days from the beginning of each quarter.

□ Settlement Reserve (Article 54 of the KRX’s Article of Incorporation) To secure the fund necessary for the fulfillment of settlement obligation, the KRX sets aside a part of its asset as the settlement reserve (at the present, KRW 100 billion).

□ Elimination of claims and liabilities before the netting.Numerous claim-liability relationships between the KRX (CCP) and a clearing member are transformed to a single claim-liability relationship per payment amount and issue after netting.

□ Reduction of settlement amount by nettingAfter netting, the amount that the market participants have to pay and collect shrinks more than 90% from the original trading amount.


B. Settlement guarantee system (Joint Compensation Fund)

C. Reduction of settlement risk by netting

KRX

KOREA EXCHANGE


According to the BIS(Bank for International Settlement), the DVP is a mechanism which links a system for transferring funds (payment) to a system for transferring the securities (delivery) in a way that ensures that payment occurs if and only if delivery occurs.There are three types of DVP system, i.e., model 1 (gross securities vs.gross funds), model 2 (gross securities vs. net funds), and model 3 (net securities vs. net funds).The KRX has adopted the model 3, thus transferring the settlement securities and payment amount determined by netting through the KRX accounts, and the risk that could arise due to the time difference inthe book-entry transfers of payment and securities is reduced throughthe use of the CCP system (assumption of liability, accumulation of Joint Compensation Fund, discharge of settlement obligation, etc.)

□ When a clearing member commences the bankrupt or rehabilitation procedures, the clearing and settlement system of the KRX is protected under the “Debtor Rehabilitation and Bankruptcy Act”, thus ensuring the settlement completion. Protection of clearing system (netting system): When a market participant commences the bankruptcy or rehabilitation procedures, the effects take place in accordance with the decisions of the operator of the clearing and settlement system (i.e., the KRX), and the clearing and settlement procedure is not subject to the cancellation, termination, abrogation and negation.

Guarantee of settlement completion: In case where the institutions participating in the payment and settlement system, which are designated by the Bank of Korea, are required to commence thebankruptcy and rehabilitation procedures, the effects take place inaccordance with the decisions of the operator of the payment andsettlement system.

D. Realization of DVP (Delivery Versus Payment) through the CCP

E. Risk management in case of the bankruptcy/rehabilitation of clearing member

KRX

33, Yoido-dong, Youngdeungpo-gu, Seoul 150-977, Korea

Tel : 82-2-3774-9000

Fax : 82-2-769-1028

E-mail : [email protected],kr

http://www.krx.co.kr

introduction to securities trading in krx

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