South Korea's Fair Trade Commission fined 15 banks and securities firms a combined 1.63 trillion won ($1.22 billion) on Wednesday for colluding on bids in government bond auctions, the largest penalty the regulator has ever imposed in a single case, according to Korea JoongAng Daily.

All 15 are primary dealers of Korean Treasury bonds, the group of institutions that underwrites the government's debt sales. The FTC said their coordination pushed up auction yields and raised what the state paid to borrow. For investors in Asia, the case touches two things at once: the earnings and capital of some of Korea's largest listed financial groups, and the plumbing of a sovereign bond market that sets the benchmark for pricing loans and other debt across the economy.

The fine beats the previous record of 1.03 trillion won that the FTC levied on Qualcomm in 2016 for abuse of a dominant market position. Yonhap, in a report carried by The Korea Herald, put the total at 1.62 trillion won; the difference reflects rounding.

Which firms were fined

The sanctioned group includes 10 brokerages and five banks. The securities firms are Kyobo, Daishin, Meritz, Mirae Asset, Samsung, Shinhan, NH Investment & Securities, KB Securities, Kiwoom and Korea Investment & Securities. The banks are KB Kookmin Bank, NongHyup Bank, Industrial Bank of Korea, Hana Bank and Korea Development Bank.

KB Securities received the largest fine, about 332 billion won. NH Investment & Securities followed with about 243 billion won, then Mirae Asset Securities with 214.8 billion won, Shinhan Securities with 147.3 billion won and Industrial Bank of Korea with 135.85 billion won, Korea JoongAng Daily reported. Amounts for the other 10 institutions were not published in the reports.

The FTC also said it would refer seven institutions to the Serious Crime Investigation Agency: Mirae Asset Securities, NH Investment & Securities, KB Securities, Kiwoom Securities, Korea Investment & Securities, Industrial Bank of Korea and Korea Development Bank. It based those referrals on how long each firm took part and how many auctions were affected.

How the collusion worked

The regulator found information-sharing or agreed rates and volumes in 150 of the 345 government bond auctions held between January 2020 and June 2023. In 145 of them, the dealers went beyond swapping information and settled specific bid yields or volumes in advance, which the FTC treated as bid rigging.

On auction mornings, dealers shared their intended bid sizes and rates with competitors, the FTC said. Close to the submission deadline, they fixed final rates mainly over Telegram and by phone. In one case, a five-second call was enough to agree on a rate of 3.7%, according to Korea JoongAng Daily.

The practice was institutional, not ad hoc, the regulator said. Some firms kept lists of rival employees' names, titles and contact details and handed them to successors, and work manuals set out whom to call at each stage of an auction.

Bid data pointed the same way. In auctions where two given institutions both took part, identical bid rates appeared 46.7% of the time during the collusion period, compared with 8.5% outside it.

The FTC said the dealers cut bid volumes or raised bid rates because they worried winning yields would fall too low. The result, it concluded, was a higher cost of funding for the government. It said such collusion wastes public money, and that fair pricing at issuance matters because government bonds serve as a benchmark for interest rates and other financial products.

Fine was cut, firms objected

Kim Geun-sung, a standing commissioner at the FTC, said the commission had reduced the penalty rate from the level proposed in its investigation report. He cited the particular features of the government bond market and the primary dealer system, the firms' financial condition and the possible impact on the market.

The institutions had argued that the value of winning bids reflects the principal of bonds bought, not sales or profit, and that any fine should be based on operating revenue instead. The FTC rejected that argument. Some firms also warned that penalties of this size could discourage participation in Treasury auctions and weaken dealers' capacity to underwrite government debt, Korea JoongAng Daily reported.

That concern reaches beyond the firms themselves, since primary dealers are the channel through which the government places its bonds, and Korean yields have already been sensitive to moves in the won (see Korea's October reserves and bond yields).

For shareholders of the sanctioned firms and their listed parent groups, the immediate question is accounting: whether the fines are booked in the fourth quarter and whether firms challenge them in court. The next step on the criminal side lies with prosecutors, who will decide whether to bring charges against the seven referred institutions.