15 primary dealers face Fair Trade Commission scrutiny over alleged treasury bond bid-rigging

Fifteen primary dealers in South Korea's government bond market are set to face a formal hearing before the Korea Fair Trade Commission over allegations of bid-rigging and information-sharing collusion in competitive treasury bond auctions. The affected auction volume totals approximately 76.2 trillion won ($53.5 billion), raising the possibility of a maximum statutory fine of around 15 trillion won.

The actual fine will be determined by the full commission after weighing the severity of the violations, their effect on competition and the characteristics of the treasury bond market — with aggravating and mitigating factors applied. Even so, observers expect the final figure to far exceed the 1.03 trillion won levied in the Qualcomm case, the largest single-case fine the commission has ever imposed.

The Fair Trade Commission's secretariat submitted its examination report on the treasury bond auction collusion case to the commission on Feb. 28 last year and sent it to the 15 respondent primary dealers on March 10 of the same year, the commission said Thursday. The commission disclosed the details publicly for the first time ahead of a scheduled full-commission deliberation.

The respondents include 10 securities firms — Kyobo, Daeshin, Meritz, Mirae Asset, Samsung, Shinhan, NH Investment, KB, Korea Investment and Kiwoom Securities — and five banks: Kookmin, Nonghyup, IBK, Hana and Korea Development Bank.

An examination report sets out the alleged violations the examiner identified during the probe and recommends remedial action. The examiner's findings are not binding on the commission, however, and the final determination on whether the law was violated — and the level of any sanctions — will be made through an independent commission deliberation.

The Ministry of Economy and Finance issues treasury bonds to fund the government's fiscal needs. Treasury bonds are among the most actively traded instruments in the bond market and serve as a key indicator of liquidity conditions, as they closely track prevailing interest rates.

Treasury bonds are issued primarily through competitive auction. The ministry operates a primary dealer system under which qualified firms are granted the right to participate in auctions; dealers are also obligated to fulfill market-making duties, including posting asking prices in the secondary market.

The examiner found that the 15 firms engaged in bid-rigging and information-sharing collusion over roughly three and a half years, from January 2020 through June 2023. The examiner calculated the relevant sales volume at approximately 76.2 trillion won, using the awarded bid amount as the basis given that the collusion occurred in the process of purchasing treasury bonds.

The examiner concluded that the conduct constituted a serious violation of the Fair Trade Act's prohibitions on bid-rigging and information-sharing collusion, and recommended corrective measures, the imposition of fines, and criminal referrals of the companies and relevant current and former executives and employees.

Applying the upper limit of the surcharge rate for "very serious violations" under the commission's fine guidelines to the relevant auction volume, the maximum statutory fine could reach approximately 15 trillion won — far exceeding the 1.03 trillion won levied in the Qualcomm case, the largest single-case fine the commission has ever imposed. The actual fine will be finalized through the commission's deliberation process.

The commission said the examination report runs to approximately 12,000 pages, making it a major proceeding, and that respondents were given about six months — including extensions — to submit written responses in order to protect their right to a defense. Of the 18 registered primary dealers, three were excluded from the probe after investigators found no evidence of their involvement in the collusion.

The commission will make its final ruling on whether the law was violated through a full-commission deliberation, and if violations are confirmed, will determine the specific level of sanctions at that time.