FKI: “Hedge funds conceal stakes through derivatives ... disclosure rules need an overhaul”

[Financial News] A proposal has been made to strengthen the disclosure system to prevent institutional investors, including hedge funds, from concealing stakes through derivatives. The idea is to require disclosure of derivatives contracts related to securities of listed companies, as in the United States and Japan, to safeguard ordinary shareholders’ right to know. 
There is also a view that consideration should be given to lowering the threshold for large shareholdings from the current 5% to 3%. 
The Federation of Korean Industries (FKI) said on the 14th that the measures were set out in a report, “Measures to Improve the Disclosure System for Changes in Shareholdings,” commissioned from Oh Seong-geun, a professor at Jeju National University’s Law School.
According to industry sources, the Democratic Party of Korea is recently pursuing a plan to ease disclosure obligations so that institutions can more actively express their views to listed companies.
The FKI pointed out in its report that “major countries such as the United States and Japan are successively overhauling their shareholding disclosure systems to address ordinary shareholders’ information blind spots and adapt to changes in capital-market conditions,” adding that this “contrasts with the situation in Korea, where disclosure burdens on institutional investors are instead being eased under the pretext of shareholder activism.”
The current Capital Markets Act requires anyone who comes to hold 5% or more of a listed company’s shares to report their holding purpose and stake, among other details, to financial authorities. However, cash-settled derivatives such as total return swaps (TRS) are not subject to large-shareholding reporting.
The report pointed out that this could allow institutional investors, including hedge funds, to enter into separate contracts with multiple financial firms, build up stakes without disclosure, and then unwind all the contracts at once to emerge as major shareholders.
The United States and Japan require disclosure of derivatives contracts related to securities of listed companies, recognizing that derivatives could be misused during corporate control disputes to conceal actual control or exert excessive influence.
The FKI noted that “although financial products are becoming increasingly complex, the current shareholding disclosure system is not properly capturing these changes,” and that “ordinary shareholders’ right to know could be infringed when so-called ‘hidden stakes’ come to light belatedly.”
The report also recommended considering a reduction in the current 5% reporting threshold, arguing that amid increasingly dispersed shareholdings in today’s market, even a 3% holder should effectively be considered a large shareholder. In the United Kingdom and Germany, the reporting threshold is 3%.
Professor Oh said, “Shareholding disclosures should be redesigned not as an obstacle to shareholder activism but as an early-warning system that detects information asymmetry between ordinary shareholders and institutional investors at an early stage,” adding, “With a variety of financial products entering the market, legislation is needed to prevent the concealment of stakes through derivatives and close disclosure blind spots.”




[email protected] Park So-hyun Reporter