The Korea Fair Trade Commission (KFTC) has begun full-scale deliberations on the suspected bid-rigging case in competitive treasury bond auctions. All 15 financial institutions serving as Primary Dealers (PDs) for government bonds are subject to sanctions, and depending on how related revenue is calculated, there is speculation that the largest surcharge in history could be imposed.

[Scale of the Case and Surcharge Projections] This case is found to have affected approximately KRW 76.2 trillion worth of treasury bond auctions. The KFTC examiner calculated the winning bid amount of KRW 76.2 trillion as the relevant revenue. Under current law, bid rigging allows for surcharges of up to 20% of the related revenue. Applying this standard, surcharges are estimated at approximately KRW 8 trillion at a 10.5% rate, KRW 11 trillion at 15%, and over KRW 15 trillion at 20%. These figures far exceed the KFTC's largest single-case surcharge record of KRW 1.0311 trillion imposed in the Qualcomm case.

[Sanctioned Financial Institutions] According to the examination report, the respondents include 10 securities firms and 5 banks. The securities firms are Kyobo, Daishin, Meritz, Mirae Asset, Samsung, Shinhan Investment, NH Investment, KB, Korea Investment, and Kiwoom Securities. The banks are KB Kookmin, NH Nonghyup, IBK Industrial Bank, Hana, and Korea Development Bank. These financial institutions are suspected of engaging in bid rigging and information exchange during competitive treasury bond auctions over a period of approximately three years and six months from January 2020 to June 2023. All 15 firms currently maintain their PD status, meaning that the core institutions leading the issuance and circulation of government bonds are subject to review.

[Investigation and Deliberation Process] The Primary Dealer system for treasury bonds is a framework in which the government grants qualified financial institutions the authority to participate in treasury bond auctions and imposes market-making obligations such as presenting bid-ask quotes in the secondary market. The KFTC's secretariat submitted the examination report on the treasury bond bid-rigging case to the Commission on February 28 of last year and sent it to the relevant businesses on March 10. The report included findings from the investigation of illegal activities, along with recommendations for corrective orders, surcharges, and criminal referrals of corporations and current and former executives. However, the examiner's assessment does not immediately become the Commission's final conclusion. The determination of illegality and the level of sanctions will be decided through an independent deliberation process. The KFTC stated that since the examination report spans approximately 12,000 pages, it granted a roughly six-month period for the submission of opinion papers to ensure the respondents' right to defense. During this period, 15 opinion papers were received, and the review required considerable time. Meanwhile, 3 of the 18 treasury bond PDs were excluded from the review due to a lack of evidence of involvement in the collusion.

[Key Issues] In upcoming plenary sessions, legal debates are expected over whether the information exchange constitutes an illegal act and the standards for calculating surcharges. The financial industry maintains that since the bond market operates on real-time pricing, communication among dealers is merely for understanding typical market trends, and artificial price manipulation is difficult. In contrast, the KFTC views this case as a hard-core collusion case centered on bid rigging rather than simple information exchange, and has determined that it actually impacted the treasury bond market. The financial firms argue that treating the entire bid amount as revenue is unjust, and surcharges should be calculated based on actual earnings such as fees and management profits.

[Market Impact and Future Schedule] Some market observers raise concerns that if surcharges in the trillions of won or the suspension and revocation of PD status become a reality, treasury bond underwriting and market-making functions could shrink, adversely affecting foreign capital flows including those tied to the World Government Bond Index (WGBI). The KFTC stated that it held prior consultations with the Ministry of Economy and Finance. The ministry reportedly agreed on the need to prevent collusion but conveyed the opinion that the importance of the PD system and its market impact should also be taken into consideration. Suspension or revocation of PD status falls under the discretion of the ministry, and the KFTC believes the side effects of collusion sanctions will not be significant. Given that considerable time has elapsed between the submission of the examination report and the start of deliberations, there is a possibility that multiple plenary sessions will be held, extending the timeline. The KFTC plans to finalize the level of sanctions by comprehensively considering market conditions, ripple effects, and the respondents' financial status during the plenary deliberation.