Korea Exchange (KRX) is the main (and sole) operator of securities markets and derivatives market in Korea under

the newly enacted Financial Investment Services and Capital Markets Act (FSCMA). With its responsibility to uphold market integrity, KRX endeavors to provide the most efficient, fair and reliable marketplaces for all participants ranging from domestic individual investors to international institutions. To this end, KRX is not hesitant to the change and progress toward better market developments and therefore continues to move forward by introducing advanced market system and infrastructures. Although such ongoing efforts would benefit our customers and the industry, we also understand that frequent changes in rules & regulations may bring unintended complexity in our market environment. Therefore, it is also important for us to provide uptodate information materials for our customers to better understand the changes. This publication specifically focuses on rules and regulations relevant to trading of listed stocks (equities & KDRs) in KRX Markets. And this English version of the publication is prepared to support our global customers who now accounts for nearly 30% of total market capitalization. We would like to acknowledge that information in this booklet may not be complete and comprehensive enough to cover all areas of market participants interests. However, we do believe that this material is helpful in providing general information about the trading environment in KRX Stock Markets. We hope you find this booklet useful. May, 2010 Korea Exchange

General Overview

1.

Introduction to KRX Stock Markets

2. Regulations related to Trading and Order Entrustment 3. Basic Trading Procedures 4. Electronic Trading Systems

1. Introduction to KRX Stock Markets

A. Market Overview Koreas Capital Market has experienced exponential growth since the launch of first national stock market, Daehan Stock Exchange, back in 1956. Having started with only 12 listed companies, the market now offers 1,960 listed equity issues with total market capitalization of 965 trillion KRW by the end of year 2009. According to the World Federation of Exchanges (WFE), Koreas Stock Market1) is ranked at 17th in terms of market capitalization and 8th in terms of trading volume among member exchanges. In addition, since the opening up of the market to foreign (nonresident) investors in 1992, foreigners have shown continuous interest in purchasing Korean stocks. They now account for nearly 30% of market capitalization in the KOSPI Market. B. Statutory Structure of Korean Securities Markets Having consolidated 4 different market operating organizations back in 2005, Korea Exchange (hereinafter KRX) is now the main operator of Koreas Securities Markets2) and Derivatives Market under the newly enacted Financial Investment Services and Capital Markets Act (hereinafter the FSCMA). The FSCMA is governed by Financial Services Commission (hereinafter FSC) and its regulatory enforcement is implemented by Financial Supervisory Services (hereinafter FSS).

1) Both KOSPI Market & KOSDAQ Market combined. 2) The FSCMA defines Securities Markets as marketplaces provided by KRX to trade listed securities including debtsecurities, equitysecurities, beneficiary certificates, investment contract securities, derivativescombined securities, and securities depository receipts. This booklet focuses on Stock Markets which includes equitysecurities & depository receipts. Please note that trading mechanism covered in this booklet may not always be applied to debtsecurities, derivativescombined securities, beneficiary certificates, and investment contract securities.

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Newly enacted FSCMA

The Financial Services and Capital Markets Act (FSCMA) was legislated in August 2007 and went into effect on February 4, 2009. Main purpose of the ACT is to support so called Big Bang in Koreas capital market industry and to strengthen the industrys competitive edge in the global market. The FSCMA consolidated 6 existing laws* and partially adopted 9 existing laws that were relevant to the capital market and financial industry in Korea (excluding the Banking Act and Insurance Business Act).
* includes the Securities Exchange Act, Futures Trading Act, Indirect Investment Act, Merchant Banks Act, Trust Business Act, Korea Securities & Futures Exchange Act.

Within this legal framework, KRX operates 2 Securities Markets; KOSPI market as a main board and KOSDAQ market as a venue to small and medium sized enterprises. Trading and clearing services are provided through KRX Systems which are assisted by Korea Securities Computer Corporation (hereinafter KOSCOM) and Korea Securities Depository (hereinafter KSD) for backoffice operations.
Structure of Korean Capital Market

C. Listed Securities on KRX Markets At KRX Securities Markets, following types of listed securities are available for trading. i. Stocks, including Equities and Korea Depository Receipts (hereinafter KDRs);

ii. Exchange Traded Funds (hereinafter ETFs); iii. Certificate of Subscription Rights3); iv. Subscription Warrants4); v. Equity Linked Warrants (hereinafter ELWs); vi Beneficiary Certificates; and vii. Debt Securities, including Government Bonds and Corporate Bonds.

2. Regulations related to Trading and Order Entrustment

A. Relevant Rules & Regulations In Securities Markets, where a variety of investment products change hands everyday, it is necessary to have a standardized system to ensure orderly and fair transactions for all market participants. Accordingly, in Korea, article 393 of the FSCMA states that the rules and regulations pertaining to trading in Securities Markets shall be established by the Business Regulations of KRX. The FSCMA (412) also states that establishment or amendment of KRX Business Regulations shall be subject to approval of FSC. Currently, as an official market operator in Korea, KRX has established KOSPI Market Business Regulation and KOSDAQ Market Business Regulation for respective markets. And, each Business Regulations have the Enforcement Rules to stipulate specific conditions of the regulations.
3) Rights to subscribe for new shares which are to be issued by the company for additional capital increase 4) Warrant, separated from Bond with Warrants (BWs), having exercisable rights for issuance of new shares.

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The FSCMA also delegates specific enforcement regulations to FSC which has established Regulation on Financial Investment Business, Regulation on Securities Issuance and Disclosure, and etc. for such matters. B. KRX Business Regulations KRX Business Regulations stipulate rules & regulations on 4 major areas of concerns; 1) order entrustment, 2) trade executions, 3) market operations, and 4) clearing & settlement. i. Order Entrustment rules cover methods and procedures that securities companies5) (with KRX Membership) have to comply with when conducting customer brokerage businesses. Such methods and procedures include opening accounts, receiving entrustment of orders, requirements on margining (collecting good faith deposits), brokerage commissions, and etc. ii. Trade Execution rules cover methods and procedures of trading in the market. Such matters include trading hours, trading days, execution methods, and etc. iii. Market Operation rules cover matters relevant to ensuring fair price discovery in the market. Such matters include trading halts, shortselling regulations, price adjustment on exdividend date and etc. iv. Clearing and Settlement rules cover methods and procedures of post trading process. These rules cover areas such as, but not limited to, handling of settlement failures, payment of settlement cash, and delivery of securities.

5) Registered companies with the license for Investment Brokerage Business or Investment Dealing Business, authorized by FSC, shall have corporate title of either Securities Companies or Financial Investment Businesses according to the FSCMA. Before the FSCMA, or under (now repealed) Securities Exchange ACT, these licensed companies were titled as Securities Companies and most of them still maintain the title as of today.

3. Basic Trading Procedures

A. Opening Accounts and Placing Orders In order to trade in KRX Stock Markets, every investor has to first open a trading account at a securities company that has obtained KRX Membership6) (hereinafter Members). Investors are to place (or submit) their trading orders through the Members which act as agents in the market. Immediately after receiving customer orders, Members have to submit corresponding Quotations7) to KRX markets on the basis of time priority. Foreigners (non residents) need to obtain registered Investors Registration Certificate (IRC) from FSS before opening a trading account. Foreigners may appoint a Standing Proxy who would conduct these processes on their behalf. B. Trade Executions and Notifications KRX Trading System matches and executes received Quotations according to the predetermined auction principles, and then immediately notifies the results of trade executions to concerned Members. Members, in turn, notify their customers of the trading results. C. Settlement Based on the results of trade executions, customers must make the payment for purchased securities or deliver the securities sold to relevant Members by the settlement deadline set by the respective Members. Mostly, transfer of cash or securities in customers trading accounts is processed by the Members.

6) Licensed Securities Companies (or Financial Investment Business Entities) has to receive Membership from KRX to directly participate in KRX Stock Markets. The companies with no KRX Membership have to entrust their customer (or proprietary) orders to KRX Members for transactions in the market. Membership requirements are stipulated under theKRX Membership Regulation. 7) KRX Business Regulations simply define Orders as customers expression of intentions to buy (bid) or sell (ask) certain securities and Quotations as the Members expression of intentions to carry out the trade (either proprietary or customers) under its name.

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For the final settlement process, Members8) will make payments for purchased amount and deliver securities sold to KRX which, in turn, makes the payment and delivery to its counter parties (Recipient Members).
Trading Flow at KRX Stock Markets

4. Electronic Trading Systems

A. Member Systems Member Systems (systems developed and operated by Members) perform the functions relating to customer businesses which include the account management, order routing, management of securities inventory, notification of transactions, and etc. Members began developing and operating their own inhouse systems from November 1996. However, some Members continue to outsource the system and its operation from KOSCOM which offers the PowerBase System9).

8) In this case, Clearing Members. Almost all KRX Members have license to both Trading and Clearing. 9) KOSCOM has newly developed the PowerBase System in February 2007 to replace existing Base21 system.

B. KRX Systems KRX Trading System performs full range of functions required for securities transactions such as receiving quotations, trade executions, notification of trade results, calculation of daily settlement data, and etc. Market Information System generates and disseminates various market data including prices, quotations, and market indices to be used as investment references.
KRX Launches Next Generation Trading System (EXTURE)
On March 23rd 2009, KRX has launched new trading system (EXTURE) which is to become core infrastructure in Korea securities market industry. EXTURE was developed to consolidate independent market platforms (for KOSPI market, KOSDAQ market, Derivatives market) into one single platform and to upgrade the system capacity by adopting cuttingedge technologies. Specifically, EXTURE has the capacity to process up to 40 million quotations per day (twice the capacity of former system) and average transaction turnaround time is less than 8/100 of a second. Overall, the new system has substantially improved the efficiency of trading in KRX markets.

There are many other electronic systems to perform everyday market operations; including KIND (managed by KRX) to provide corporate disclosure information, Foreign Investor Management System (managed by FSS) to assist regulation on foreigners shareholding limitations for certain stocks, Market Surveillance System (managed by KRX) to monitor any illegal and irregular trading activities, and Depository and Settlement System (managed by KSD).

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Entrustment of Trading Orders

1.

Trading Accounts

2. Receiving Entrustment of Orders 3. Rejecting Entrustment of Orders 4. Margin Deposits 5. Members Brokerage Commission

1. Trading Accounts
(1) Background
When intending to receive and process the trading orders entrusted by a customer, the concerned Member must open a trading account for the customer in advance. (77
KOSPI / 33 KOSDAQ)*.
* Hereinafter, # KOSPI refers to article # of KOSPI Market Business Regulation, and # KOSDAQ refers to article # of KOSDAQ Market Business Regulation.

Opening of trading account implies that both the Member and its customer have agreed upon certain service conditions and that customers orders will be entrusted and processed in accordance with the conditions stipulated in the agreement. By having entrustment service conditions in written document, it prevents potential disputes that may arise between the Member and its customers. It also protects the investors by allowing them to be aware of the service conditions before entrusting their trading orders.

(2) Account Opening Procedures

A. Principle of Suitability (46 of the FSCMA) Securities companies are required to obtain information about the customers status pertinent to financial investment activities and decide on which investment products are appropriate for that particular customer before opening an account or making any investment recommendations. This requirement applies retroactively to accounts established before the effective date of the FSCMA.

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Restrictions on Investment Recommendations under the FSCMA

Before the FSCMA, investor protection policy was based on principle of Your Own Responsibility under the abolished Securities Exchange Act. However, because the modern capital markets have become highly complicated due to financial globalization, asset securitization, and development of financial engineering, it is difficult for every investors to fully understand the products and make appropriate investment decisions. Thus, the FSCMA adopts Principal of Know-Your-Customer to reinforce brokers investor protection responsibilities.

In specific, Securities Companies need to classify its customers into Professional Investors and Ordinary Investors10) based on the customers financial status and level of knowledge on financial investment products. In case of Ordinary Investors, before opening an account, Securities Companies are required to conduct a survey or an interview to obtain the customers information such as investment purpose, financial status, and investment experiences. After having the customer to confirm the information by signing the written statement (or by having any other method of authentic approval), Securities Companies have to keep and maintain the confirmed information in the form of document, voice recording, or any other electronic methods. When intending to provide investment recommendations to Ordinary Investors, Securities Companies must recommend the products appropriate for that particular customer. B. Agreement on Trading Accounts (77 KOSPI / 33 KOSDAQ) To open a trading account, the Member must enter into an Agreement on Trading Account with the customer. Among others, the Agreement must stipulate following matters stating that; i. This trading account is opened for the purpose of the Member and the customer to trade in the Securities Markets established by KRX; and pared by the Member.

ii. The customer consents to the Agreement on Customer Trading Servicespre-

10) Defined under article 46 of the FSCMA

In addition, when opening an account, Members are required to keep and maintain the necessary customer information such as the name, address, and resident identification number. This information shall be confirmed (with an authentic signature) by the customer at the time of account opening. C. Agreement on Customer Trading Services (78 KOSPI / 34 KOSDAQ) The Agreement on Customer Trading Services is a standardized agreement that is to be signed by the customer when opening a trading account. This Agreement is standardized because it is difficult for Members to prepare individual service agreement for each customer. KRX Business Regulations require the Agreement to clearly state following matters; i. The Member and the customer shall be compliant to relevant laws, enforcement decrees, KRX business regulations, and etc.; quotation receiving hours11); iii. Conditions on Members right to reject customer orders and Members right to collect good faith deposits (also known as margin) and brokerage commission; iv. Restrictions on Members arbitrary trading of customers account; and v. Actions to be taken in case of settlement failures. Nonetheless, Members may add any other service conditions provided that the conditions do not contradict relevant laws and regulations. Additionally, Members are required to explain the important conditions of the Agreement to the customers at the time of account opening. When establishing new service Agreement or amending the existing ones, the concerned Member shall notify the details to KRX within 5 days after its effective date.

ii. Conditions on priority of customer orders received before opening of KRX

11) See III1(1) on Trading Hours

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2. Receiving Entrustment of Orders (109 ER KOSPI / 41 ER KOSDAQ)*

* Hereinafter, ER refers to Enforcement Rules of respective Business Regulations

(1) Receiving Orders in Written Document Forms

Members may receive entrustment of orders through an order slip (written order form) which shall be written and signed (or imprinted his/her seal, hereinafter the same) by the customer.

(2) Receiving Orders over Telephone, Facsimile, etc.

When Members are receiving orders over telephone, facsimile, and etc., the employee whos receiving the order (hereinafter Recipient) must confirm that the person entrusting the order is the customer himself/herself. After the confirmation, the Recipient has to write up an order slip based on customers instruction and sign the slip thereon. The Recipient shall keep and maintain the customers order instructions (by voice recording, FAX copies, etc.) as a proof of order entrustment for a specified period. Instead of writingup of order slips, the Recipient may input trading orders in electronic method with an authentic electronic signature thereon. In this case, the Recipient may keep and maintain the record in a separate form and may not print the copies of order slips.

(3) Receiving Orders through Electronic Communication Network

When Member are receiving the entrustment of orders through electronic communication network such as Home Trading System (HTS), Mobile Trading System (MTS), and Internet Websites, the Member and the customer must enter into an Agreement on Order Entrustment through Electronic Communication Network in advance. Online trading systems offered by Members shall be reasonably designed to accommodate safe financial transactions. The system shall be capable of, but not limited to, performing functions such as verification of customers identity and monitoring of trading records by the customer.

Introduction of Home Trading (Apr. 1st 1997)

After having introduced the fully automated electronic trading system in 1997, KRX also adopted Home Trading entrustment method to provide investors with complete online trading environment. It enabled investors and Members to enjoy increased efficiency and cost reduction in the market by conducting entire trading process (order routing, members quotation submission, matching at KRX, notification of trade results, and etc.) in automated format. To use this mechanism, investors need to simply download Members Home Trading System (HTS) on to their home PCs.

3. Rejecting Entrustment of Orders (84 KOSPI / 40 KOSDAQ)

Members have the responsibility to maintain fair and orderly trading environment and protect bona fide investors. Thus, they are required to reject customer orders that are contradicting to such responsibility. Specifically, Members must, but not limited to, reject; i. orders that breach or has the potential to breach the FSCMA provisions such as Return of Insiders Short Swing Profits (172), Restriction on Use of Material Nonpublic Information (174), Restriction on Market Price Manipulation (176), and Restriction on Unfair Trading (178); and ii. orders in breach of shortselling regulations (including the uptick rule). In case of a customer having unsettled balance in the account, Members, based on the conditions stipulated in relevant agreements, may reject new orders and restrict withdrawal of cash or securities from that particular customers account.

4. Margin Deposits (87 KOSPI / 42 KOSDAQ)

Margin (also referred to as good faith deposits) is cash or securities that customers are required to deposit to Members when entrusting orders. Members would use the margin deposit as a collateral to the customers settlement obligation.

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(1) SelfRegulation on Margin Policy

In the past, the Exchanges12) determined minimum rate of margin that Members had to collect from their customers. However, since the amendment of regulations on April 1st 1998, Members have established their own margin policies. This selfregulatory approach has enabled Members to apply flexible risk management system. Most Members today require customers to deposit 40% of securities value for bid orders and entire securities sold for ask orders.
Members Margin Policy Before and After the Regulatory Change (Apr. 1998)
Before After

Margin Rate Substitute Securities Exempt Institutions Administrative Issues

Collect 40% of purchasing value at minimum Shall be limited to less than 20% of purchasing value Designated by KRX Collect 100% of purchasing value Exchange designates eligible securities and applicable value

Based on Members own policy Based on Members discretion Based on Members own policy Members may determine the value of securities within the range provided by the Exchange. (Since Oct. 2006)

Substitute Securities & Value

(2) Substitute Securities (88 KOSPI / 43 KOSDAQ)

To enhance the utility of investors securities inventory, KRX allows certain securities, instead of cash, to be used for margin deposits. So called Substitute Securities, designated by KRX, can also be used as guarantee payments and collateral for various credit transactions. (171 of the FSCMA; 425 of Regulations on Financial Investment
Business)
12) Before the consolidation in January 2005, there were 3 exchanges (KSE, KOSDAQ, KOFEX) and 1 selfregulatory institution (KOSDAQ Committee).

Currently, KRX designates following types of securities as substitute securities; Stocks (including KDRs), ETFs, Beneficiary Certificates (described under the article 189 of the FSCMA), and nonlisted Mutual Funds (excluding the privately placed funds). However, following securities issues shall not be used as substitute securities; Administrative Issues13), issues under InvestmentRisk warning14), issues under liquidation trading15), and issues of which trading has been suspended for delisting process (whether it be requested by the company or by falling under the delisting criteria). Value of substitute securities to be used for margin is calculated by multiplying the haircut ratio (a.k.a Appraisal Ratio) to the referential price of the securities issue. Members may apply different ratio within (less than) the minimum rate provided by KRX. (115~119 ER KOSPI / 47 ER KOSDAQ)
Minimum Value of Substitute Securities Calculated by KRX
Substitute Securities Referential Price Haircut Ratio Calculation Cycle

Equities, KDRs Listed Beneficiary Certificates

Closing price of previous day

Equities : 70% Constituents ot KOSPI50 Index : 80% Government Bond ETFs : 95% Government & Municipal Bonds : 95% Corporate Bonds : 85% Equity Related Bonds : 80%

Daily

Debt Securities

Avg. closing price of previous 5 trading days

Weekly

Nonlisted Mutual Avg. base price of NonBond Funds :70% Funds previous 7 days Bondoriented Funds : 80%

Monthly

13) See III3(3) for description on Administrative Issues. 14) See III3(5) for description on InvestmentRisk warning. 15) See III3(3) for description on Trading Method for Liquidation Issues.

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(3) Special Margin Collection Rule (89 KOSPI / 42 KOSDAQ)

A. Background Although regulation on Members Margin Policy has been waived to facilitate self regulatory environment, Members have an exceptional obligation to collect 100% margin from those customers who have failed to meet the balance on the settlement date. Previously, this special margin collection rule was applied only to those who have breached the shortselling regulations and those who have failed to deliver sold securities by the settlement deadline. However, prompted by the high expectations on strong market performance, there were rapid increase in customers Balance st Failures* which have raised concerns on market instabilities. Thus, on May 1 2007, KRX has adopted this special rule to minimize the potential market instability caused by overspeculative trading activities.
Understanding of Balance Failures
In KRX stock markets, Members have to complete the settlement with KRX 2 days after the transaction (T+2). This timeline is also effective to investors settlement obligation for their transactions with Members. Balance Failure occurs when an investor fails to pay the purchased amount or deliver the sold securities to the Member whom the investor entrusted his/her orders to. In such cases, the Member would complete the settlement with KRX on behalf of the customer to prevent the settlement failure. If the investor continues to lack in balance on T+3, the Member may sell the purchased securities at its own discretion.
T Equity Purchased at 40% margin T+1 T+2 T+3

Forced Sale by Balance Failure the Member by lack of cash in the in case the investor account continues to lack (60% of purchased amount) in blance

B. Rule Application When a customer fails to pay purchased amount by the settlement date (Balance Failure), the Member has to freeze the customers account against the margin trading for next 30 days. The account freeze here means that the Member has to collect 100% of purchased amount or 100% of sold securities (i.e. no margin trading) when receiving orders from that particular customer. When the account freeze is triggered by failure to deliver the sold securities, the Member has to freeze the customers account for next 90 days. To prevent or eliminate any regulatory loopholes, all Members shall apply this special margin collection rule to the customers account when; i. the customer sells the purchased securities before the settlement date (T+2) and fails to meet the payment balance on T+2;

ii. information regarding customers balance failure is registered at Individual Credit Information Agencies16) relevant to financial investment businesses by other Members (thus all Members shall freeze the account pertinent to that particular investor); and iii. there was balance failure for transactions carried out in other securities market (i.e. the rule shall be applied regardless of KOSPI Market or KOSDAQ Market) However, exceptions to this Rule shall be applied when; i. amount of balance failure is less than 100,000KRW on the settlement date; and

ii. payment or delivery is delayed by causes such as natural disaster, state of emergency, network failure, Member's mistakes or when the Member acknowledges that there was no malicious intentions or gross negligence from the concerned customer.

16) Currently, KOFIA (Korea Financial Investment Association) is a registered Credit Agency and takes the role of handling information on customers balance failures.

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Ex) When Customer Sells Purchased Securities on T+1

T T+1 T+2 T+3 T+4 T+5

Account Balance Transaction/ Settlement Action

40

(60)

50

Purchase Sold Securities Balance B/F Securities (valued at 100) (valued at 110) Failure Relieved Freeze account for 30 days

On T+2, balance failure occurs because the customer has failed to pay remaining amount (60) of purchased transaction. On T+3, the Member shall freeze the account against any margin trading for next 30 days. However, on T+3, the customer may make new purchasing transactions within the account balance (50).

5 Members Brokerage Commission (100 KOSPI / 49 KOSDAQ)

Members may levy brokerage commission for conducting customers transaction. This commission shall be collected at the time of customers settlement. Statutory rule on commission rate was completely waived on September 1 1997 to facilitate Members differentiated services and for deregulation purposes. Since then, Members have been determining their own commission policies. However, when intending to establish new policy on brokerage commission or when revising the existing policy, the Member is required to disclose the information before its effective date. Members are also required to inform KRX of the new or revised policy within 5 trading days after its effective date.
st

Trading in KRX Stock Markets

1.

Market Operations

2. Trade Executions 3. Market Management 4. Special Cases of Trade Executions 5. Alternative Trading Methods 6. Liquidity Providers

1. Market Operations
(1) Trading Hours (4 KOSPI / 4 KOSDAQ)
KSE (Korea Stock Exchange, which ran KOSPI Market before the consolidation in Feb. 2005) abolished lunch hour break (12:00~13:00) for KOSPI Market on May 22nd 2000. Since then, KRX Securities Markets have been operating single Regular Session system for a trading day. The decision in year 2000 was to promptly reflect all market information in market prices without a break and also to meet increasing demand from market participants of more trading opportunities. To meet the demand for additional trading activities, KRX runs OffHours Session (available for stocks, KDRs, ETFs) in addition to the regular session. The offhours session can be divided into Prehours and Afterhours. Trading Hours for KRX Stock Markets are shown in the table below.
Quotation Receiving Hours* Trading Hours

Regular Session Offhours Session Prehours Afterhours

08:00 ~ 15:00 (7hrs) 07:30 ~ 08:30 (1hr) 15:00 ~ 18:00 (3hrs)

09:00 ~ 15:00 (6 hrs) 07:30 ~ 08:30 (1 hr) 15:10 ~ 18:00 (2hrs 50min)

* Quotations (refer to quotes submitted by the Members on behalf of their customers) shall be submitted to the Exchange only during Quotation Receiving Hours.

Quotation Receiving Hours Regular Session Trading Hours Pre-hours

07:30 08:00 08:30 09:00

Afler-hours
15:00 15:10 18:00

(2) Trading Days (5 KOSPI / 5 KOSDAQ)

Trading days of KRX stock markets are from Monday through Friday and markets will not be open for trading and settlement on following holidays.

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i.

Holidays according to the Regulation on Government Holidays (which includes Sundays, National Election days, etc)
st

ii. Labor Day (May 1 ) iii. Saturdays iv. December 31st (when it's a holiday, immediately preceding business day) v. when KRX deems market closure is necessary due to extreme market conditions. Last day of the year (Dec. 31 ) is closed to allow the market industry to conduct necessary end of year business processes such as market actions (exdividends, and ex rights) and IT system inspections. Before 2001, markets were closed for more than 3 days at the end of the year due to cumbersome process such as registration of shareholders name for bookclosure.
st

(3) Trading Unit (33 ER KOSPI / 18 ER KOSDAQ)

Trading unit (also known as the Trading Lot) is the acceptable quantity for trading of securities in the exchange market. Smaller trading unit may enhance investors trading convenience, but, on the other hand, it may increase the traffic in the system causing transaction delays. Large trading unit will have just the opposite impact in the market. Thus, it is important for the Exchange to establish optimal trading unit taking into account of both convenience and efficiency of market participants. Trading Units for listed securities on KRX markets are shown in the table below.
Trading Unit KOSPI KOSDAQ

Stocks Korea Depository Receipts (KDRs) Exchange Traded Funds (ETFs) Equity Linked Warrants (ELWs) Subscription Warrants Certificate of Subscription Rights Beneficiary Certificates

10 (1, if the base price is higher than 50,000 KRW) 10 1 10 1 1 10

1 1 1 1 1 1

During the offhours session (available for stocks, KDRs, ETFs), trading unit shall be 1 regardless of the security types and the prices. KRX may change trading units when deemed necessary due to certain market conditions such as sudden surge of quotation traffic in the market.

(4) Tick Size (32 ER KOSPI / 18 ER KOSDAQ)

Tick Size is the smallest price increments available in the market. Based on similar reasoning as the trading unit, KRX establishes the optimal tick size taking into account of efficiency and convenience of market participants. Wider tick size benefits investors with faster transactions (by having less burden on the system), but it also increases the spread (limiting the number of prices that investors can choose) causing additional transaction cost. Narrower tick size will have just the opposite effects. At KRX securities markets, different tick sizes are applied taking into account the price of securities (as shown in the table below).
Tick Size (in KRW) KOSPI Market KOSDAQ Market

Price of Securities (in KRW)

5,000 or higher 10,000 or higher 50,000 or higher 100,000 or higher 500,000 or higher

less than 5,000 less than 10,000 less than 50,000 less than 100,000 less than 500,000

5 10 50 100 500 1,000

5 10 50 100 100 100

* To minimize the tracking errors, tick size of 5KRW is applied to all ETFs regardless of the price (effective since July 2005 for KOSPI Market and August 2004 for KOSDAQ Market).

(5) Types of Orders (Quotations) (2 KOSPI / 2, 372 ER KOSDAQ)

KRX Business Regulations define Orders as expression of customers intentions to buy (bid) or sell (ask) a security and Quotations as the expression of Members intentions to carry out the trade (either proprietary or customers) under its name. There are different types of orders that customers can place through KRX Members

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(brokers). These types of orders are same in that customer specifies the issues and quantity to be traded, but different in terms of price conditions. Following types of orders are available at KRX stock markets. Limit Order, which is the most commonly used type of order, is an intention to trade at the price (or at better price if available) specified by the investor. Thus, bid limit orders will be executed only at (or at prices lower than) the price specified by the investor. On the other hand, ask limit orders will be executed only at (or at prices higher than) the price specified by the investor.
e.g.) A bid limit order of 10,000KRW is traded at 10,000KRW or lower, and an ask limit order of 10,000KRW is traded at 10,000KRW or higher.

Limit orders are useful to investors in that orders will not be traded at unfavorable prices than the price specified. However, its disadvantage is the possibility of not being traded at all if there are no counter orders that meet the specified price conditions. It should be noted that investors can only place limit orders for subscription warrants, certificate of subscription rights, ELWs, and beneficiary certificates. Market Order17) is an intention to trade immediately at the best price available in the market. Thus, investors will specify the issue and quantity but not the price. Since it has no price conditions, market order is advantageous in that it can be traded immediately (if there are available counter orders) at the time of placing the order. However, it poses the risk of extreme price fluctuations in case when there is concentration of one sided (bid or ask) market orders with insufficient orders on the other side. Therefore, the market order can not be used for trading securities which are not subject to the daily price limitations18) or securities which have lack of liquidity. Those types of securities are; Subscription Warrants, Certificate of Subscription Rights, ELWs, and Debt Securities.
17) Introduced on Nov 25th 1996 for KOSPI Market and on Jul 1st 2002 for KOSDAQ Market 18) See III1(6) for description on Daily Price Limitations

 LimittoMarketonClose Order19) (hereinafter LMC Order) is an order that participates in the market as a limit order during the regular session, but has the condition to convert remaining quantity of the order to a market order at 14:50 when the quotation receiving hours begins for the market closing call auction20). LMC order type complements the drawbacks of limit order by enhancing the possibility of the order being traded during the day while maintaining the benefits of limit orders throughout the regular session. LMC order can not be placed with the prices at upper bound or lower bound of daily price limitations. Immediately Executable Limit Order21) is a limit order having condition to designate the limit price at the best available price on the counter side, thus allowing the order to be executed immediately yet limiting the tradeable price. For instance, in case of an immediately executable limit order to sell a security, the highest bid price at the time the order is received by KRX will be the specified limit price of that immediately executable limit order. And vice versa for bid orders. Best Limit Order22) is a limit order having condition to designate the limit price at the best available price of the same side orders. For instance, in case of a best limit order to sell a security, the lowest ask price at the time the order is received by KRX will be the specified limit price. And vice versa for bid orders. Target Price Order23) is an order specifying the intention to trade at (or close to) the target price such as the Volume Weighted Average Price (hereinafter VWAP). The Member, whom the order is entrusted to, will split the target order into fractions and submit the quotations for each fraction throughout the trading session to meet the target price. In this case, since there is no Target
19) 20) 21) 22) 23) Introduced on Nov 25th 1996 for KOSPI Market and on Oct 24th 2005 for KOSDAQ Market See III2(2)(a) for description on Call Auction. Introduced on Jan 26th 2001 for KOSPI Market and on July 26th 2004 for KOSDAQ Market Introduced on Jan 26th 2001 for KOSPI Market and on July 26th 2004 for KOSDAQ Market Introduced on May 30th 2005

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Price Quotations, Members will submit numerous Limit Quotations or Market Quotations.
Target Price Order and Quotation

Places Target Price Order (at VWAP)

Places Limit Quotations or Market Quotations

Customers (investors)

Members

KRX

Special order conditions (IOC & FOK)

Investors can attach any one of following 2 conditions on Limit Orders, Market Orders, and Immediately Executable Limit Orders to carry out diverse trading strategies. IOC (Immediate or Cancel): The order shall be executed immediately based on the availability of orders on the counter side and cancel, immediately, all remaining quantity of the order at the time it is received by KRX (entered into the orderbook). FOK (Fill or Kill): The order shall be executed immediately in full quantity based on the availability of orders on the counter side at the time it is received by KRX and cancel, immediately, of the order if entire quantity can not be traded. Above conditions can not be attached to LMC Orders and Best Limit Orders.

(6) Daily Price Limitations

A. Introduction Daily Price Limitation is a set of upper bound and lower bound to which the price of listed securities can move in a day. Thus, investors or Members can not place orders or quotations exceeding the upper or lower price limitations. KRX adopts the daily price limitation system to facilitate fair market price discovery and to protect investors from sudden price fluctuations. B. Rule Application (20 KOSPI / 14 KOSDAQ) KRX imposes daily price limitations of 15%. On each day 15% shall be multiplied

to the baseprice of the issue and such amount is added to the baseprice for an upper price limit and subtracted from the baseprice for a lower price limit. Any residual amounts not pertaining to the tick size is disregarded so that all price limits are set at available tick sizes. Daily price limitations are not applied to ELWs, Certificate of Subscription Rights, Subscription Warrants, and issues under liquidation trading. KRX has recently amended the regulation (effective as of May 10 2010) to allow Leveraged ETFs24) to have daily price limitations of 15% multiplied by its tracking ratio (i.e. a product with the tracking ratio of 2X will be applied with 30% limitations).
History of Daily Price Limitations
Date KOSPI Market Date KOSDAQ Market
th

Before Apr. 1995 Apr 1 1995 Nov 25 1996 Mar 2 1998 Dec 7 1998
th nd th st

Fixed Amount 4.6% (based on price on average of the issue) 6% Fixed Rate Basis 8% 12% 15%

Before Nov. 1996 Nov 1 1996 May 25 1998 Mar 28 2005

th th st

Fixed Amount 5.4% (based on price on average of the issue) 8% Fixed Rate Basis 15% 15%

(7) Baseprice
Baseprice is used as the basis for determining the price limitations of stocks, ETFs, beneficiary certificates, etc. during the day. A. Rule Application (30 ER KOSPI / 17 ER KOSDAQ) In normal cases, closing price of the previous day is used as the baseprice. However, in case where the closing price is considered to be inappropriate for the baseprice, KRX may set alternative baseprice for the day. For example;

24) Leveraged ETFs refer to funds, according to article 726(4)1 of Regulations on Financial Investment Business, that are managed to track price movement of underlying assets multiplied by the fixed rate (tracking ratio).

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i.

In case when there is a corporate action such as capital increase (excluding the 3rd party allocation method and the public offering method), stock dividend, stock split, stock consolidation (also known as a reverse stock split), and etc., theoretical price shall be the baseprice. This price adjustment is necessary to maintain the consistency in value of securities issue before and after the corporate action.

ii. In case of newly listed issues or issues having capital reduction, the baseprice shall be determined in the market through single price Call Auction method25). B. Special Quotation Price (2 KOSPI / 2 KOSDAQ) To reflect market pressure onto the price of securities issue even when there was no transaction during the day, special quotation price (it can also be described as quotation driven price) is construed as the closing price of the day and shall be used as the baseprice for the next trading day. This special quotation price shall be the lowest ask price (or the highest bid price) in case when there are ask (or bid) quotations with prices lower (or higher) than the baseprice. This price recognition, although there was no transaction, is necessary especially when important information about the company is disclosed. In this case, there may only be onesided quotations with no transactions in the market even though value of shares should reflect the information. When the price of preferred shares is 10 times higher than the price of its common shares, bid quotations shall not be construed as the special quotation price.

(8) Publication of Quotation Information (126 ER KOSPI / 52 ER KOSDAQ)

Realtime quotation information is made public to assist the market participants in making their investment decisions, thus increasing the efficiency of price discovery in the market. During continuous auction (regular session), the price and quantity of 10 consecutive bid and ask quotations from (and including) the best quotations on each side and total
25) See III2(2)(a) for description on Call Auction Method.

quantity of those quotations on each side are disclosed for public information. For ELWs, quotations submitted by the Liquidity Providers26) are published separately. During Quotation Receiving Hours for call auction sessions, price and quantity of 3 consecutive bid and ask quotations from (and including) the expected best quotations on each side and expected call price and volume are disclosed. However, during quotation receiving hours for opening call auction, disclosure of expected call price and volume shall begin at 08:10.

2. Trade Executions
(1) Principles of Trade Execution (22 KOSPI / 17 KOSDAQ)
In the exchange market, a large number of quotations compete with each other for a better price and for a faster trade. Therefore, to provide fair competition environment, the exchanges need to establish the principles of trade executions i.e., the price priority and the time priority. A. Price Priority In case of bid quotations, a quotation with higher price has priority over the quotations with lower prices. And in case of ask quotations, a quotation with lower price has priority over the ones with higher prices. Market quotations always have price priority over limit quotations. However, due to daily price limitations, an ask market quotation and an ask limit quotation at the lower price limit are regarded as having the same price priority. Same exception is applied to bid market quotations and bid limit quotations at the upper price limit. B. Time Priority Among quotations at the same price and among market quotations, the quotation received earlier has priority over those received later.
26) See III6 for description on Liquidity Providers.

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Ex) Trade Executions

Ask Quotations (Quantity) 800, 200 100, 100 80, 100 20 (Best Ask) Price 20,150 20,100 20,050 20,000 19,950 Bid Quotations (Quantity) 10 (Best Bid) 200, 300 20 200, 100

* , and refer to sequence of trade executions. As shown in the table above, bid quotation and ask quotation is executed first in accordance with price priority. Also, among quotations at the same price, quotation , which was received earlier, is executed before quotation .

C. Exception to Time Priority (Simultaneous Quotations) There is an exception to the principle of time priority during Single Price Call Auction27) (hereinafter Call Auction). This exceptional case is applied; i. when the opening price (call price) of an issue is determined at upper or lower price limitations; and, ii. when trading resumes after the trading suspensions (from circuit breakers28), system malfunctions, or trading halts29)) with the initial price (call price) at upper or lower price limitations. In these cases, bid quotations at upper price limitations (including bid market quotations) or ask quotations at lower price limitations (including ask market quotations) are construed as simultaneous quotations thus having no time priority over others
(22 KOSPI / 17 KOSDAQ)30).

Rationale behind this exception is to ensure fair trading opportunities for all market participants in cases of extreme market conditions. For example, if orders (quotations)

27) 28) 29) 30)

See III2(2)(a) for description on Call Auction Method. See III3(1) for description on Circuit Breakers. See III3(2) for description on Trading Halts. Introduced on Oct. 3rd 2001 for KOSPI Market and on Mar. 7th 2005 for KOSDAQ market.

are executed according to the time priority when the call price is determined at upper or lower price limitations, the investors who have placed orders later at these prices will have less chance of their orders being traded. This becomes an issue because these investors can not correct their orders to have price priority over others due to daily price limitations. D. Principles of Simultaneous Quotations (34 ER KOSPI / 19 ER KOSDAQ) When the call price (for opening price or initial price after the trading resumption and not for the closing price) is determined at upper price limit, incoming ask quotations should be evenly matched with bid quotations placed at upper price limit and vice versa (to the case when the call price is determined at lower price limit). In these cases, following principles shall be applied; Customer priority Customer orders have execution priority over Members proprietary orders. This principle is established to prevent the conflict of interests arising from Members conducting both the brokerage business and the dealing business. Quantity Priority Among customer orders and among proprietary orders, an order with larger quantity has priority over an order with smaller quantity. Based on this sequence, fixed quantity of shares shall be distributed to the orders placed at price limitations. This distribution method will provide level playing field for all market participants (including retail investors) by matching on a pro rata basis during exceptional call auction conditions. Fixed number of shares to be distributed for each cycle is shown below;
KOSPI Market: 10trading unit (100shares) 50trading unit (500shares) 100trading unit (1,000shares) 200trading unit (2,000shares) 1/2 of remaining quantity remaining quantity31) KOSDAQ Market: 100trading unit (100shares) 500trading unit (500shares) 1,000trading unit (1,000shares) 2,000trading unit (2,000shares) 1/2 of remaining quantity remaining quantity

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To provide better opportunities to the retail investors trading in small lots, the distribution quantity was further broken down into 6 cycles from 3 cycles32) on Aug. 25th 2003.
Ex) Executions when Simultaneous Quotations goes into Effect

(Case) Opening price is to be determined at upper price limit (20,150KRW), and quotations in
the orderbook at the time are shown in the table below.

Ask Quotations (Quantity)

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

Price (in KRW)

20,150 20,100 20,050 20,000 19,950 Total 16,200

Bid Quotations (Quantity)

(16,200) 1,000; 200; 10,000; 5,000; 500 ; 700 400

* , refers to sequence of quotations received by the exchange. Case here is that, as the Simultaneous Quotation goes into effect, entire 13,100 shares of ask quotations is to be distributed to 4 bid quotations at upper price limit.

(Result) Distribution and executions (at 20,150KRW) based on Simultaneous Quotation

method is shown in the table below;
Cycle Quotation Quotation Quotation Quotation (10,000 shares) (5,000 shares) (1,000 shares) (200 shares)

Total Volume (13,100 shares)

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

31) In case of securities with baseprice higher than 50,000KRW, the distribution quantity shall be; 10 shares 50 shares 100 shares 200 shares 1/2 of remaining quantity remaining quantity 32) Previous 3 cycle distribution: 100shares 1/2 of remaining quantity remaining quantity.

(Case) Lets assume that additional quotations ~ (shown in the table below) have been
submitted after the market open. Ask Quotations (Quantity) 3,000 1,000 500 Price (in KRW) 20,150 Bid Quotations (Quantity) 2,400 700 1,000 500

After the determination of opening price (at upper price limitations), Simultaneous Quotation is still in effect as there are remaining quantities unexecuted for quotation and . In this case, although regular trading session has opened, Continuous Auction will not begin until all quotations under Simultaneous Quotation are executed. (Result) Simultaneous Quotation will be relieved after the executions of following quotations; 2,400 shares, 600 shares, 100 shares. And following executions will be made according the principle of time priority; 900 shares, 100 shares, 400 shares.

(2) Method of Trade Executions

Method of Trade Executions varies according to competitive relationship among trading orders i. Competitive Auction: trades are executed based on price competition among buyers and sellers. buyers and sellers. In general, KRX stock markets adopt competitive auction method, but, also adopt negotiated transaction method as an exception33). A. Single Price Call Auction (23 KOSPI / 18 KOSDAQ) (Application) As shown in the table below, Call Auction method is applied when there is a need to find new equilibrium price after having discontinued trading in the market.

ii. Negotiated Transaction: trades are executed based on negotiated price between

33) See III5 for description on BlockTrading.

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Call Auction is applied when; Quotations Participating in the Call Auction are;

determining opening price of the regularsession

received from the start of quotation receiving hours (08:00) to the opening of regularsession (09:00)

determining initial price when received during first 10 minutes of trade retrade resumes after the trading sumption (in case of system malfunction, it may halts or suspensions vary depending on the case) determining closing price of the received during last 10 minutes of regular session regularsession (14:50~15:00) determining periodic prices of received from the start of quotation receiving issues under liquidation trading hours (08:00) to the closing of regularsession (15:00) determining periodic prices of (periodic call execution will be made at every 30 Administrative Issues in KOSDAQ minutes interval) Market determining periodic prices during offhours call auction session received from the start of offhours call auction session (15:30) to the end of the session (18:00) (periodic call execution will be made at every 30 minutes interval)

(Call Execution method) using the price at which the most bid and ask quotations can be matched (Call Price), trades are executed, in accordance with the time priority, between following quotations; i. entire quantity of ask quotations at prices lower than the call price and entire quantity of bid quotations at prices higher than the call price ii. for quotations at the call price, entire quantity of at least one side of quotations (either ask or bid quotations)
Ex) Executions based on Call Auction method
As shown in the table below, by sequentially matching from the highest bid quotations with the lowest ask quotations, it is found that the largest quantity can be traded at 15,250KRW (Call Price). Thus all bid quotations with prices above the call price and all ask quotations with prices below the call price will be matched. Quotations at the call price will be executed according to the time priority.

Ask Quotations (Quantity)

Price (in KRW) 15,400 15,350 15,300 15,250 15,200 15,150 15,100 15,050

Bid Quotations (Quantity) 1000 300 200 300 100 200

2,000 1,000 500 100 150 500 500 500 150

* : no execution; : partially executed; : entire quantity executed ** , refers to sequence of quotations received by the exchange. In case where the call price is determined at daily price limitations, Simultaneous Quotations will go into effect.

(Random End) When potential call price (including offhours call auction session) deviates substantially during last minutes of quotation receiving hours, call execution time shall be extended to a point randomly decided by the system. This Random End rule34) is adopted to prevent price manipulation by placing abusive quotations during Call Auction session. Random End is triggered when potential call price (including offhours call auction session) deviates by more than 5% (3% in case of offhours call auction session) from either the highest or the lowest expected call prices35) published during last 5 minutes to the call execution time. Once triggered, call execution time will be delayed for random period of up to 5 minutes. Additional quotations (including correction or cancellation of existing quotations) shall be received during this randomly extended period and the call price will be determined at the new call execution time.

34) Introduced on Jan. 26th 2004 for KOSPI Market and on Mar. 7th 2005 for KOSDAQ Market 35) See III1(8) for description on Publication of Quotation Information.

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Random End will not be applied if the potential call price is within 1% range from the previous transaction price (the baseprice in case of call auction for opening price).
Ex) Application of Random End
Movement of expected call price 10,500 +5% 10,000 -5% 9,500 08:55 Call Execution time shall be randomly decided within 5 minutes 09:00 Potential Call Price 09:05

B. Continuous Auction36) (24 KOSPI / 19 KOSDAQ) (Application) Continuous Auction method is applied to all trading sessions where call auction is not applied. (Execution method) Based on principles of price priority and time priority, quotations are executed instantly if there are matching quotations on the counter side. Thus, multi prices will be formed continuously in the market. This method allows investors to make prompt transactions by reflecting the most uptodate market information to their trading.
Ex) Trade Executions under the Continuous Auction method
As shown in the tables below, bid quotations and ask quotations compete for a transaction in the market. And as soon as the lowest ask quotation and the highest bid quotation are matched, those 2 quotations will be executed at the price of earlier quotation

36) Defined as Multi Price Auction in the Business Regulations

(Case 1) Ask Price 10,600 10,550 10,500 10,450 200 10,400 10,350 10,300 200 (Case 2) Ask Price 10,600 10,550 10,500 10,450 200 10,400 10,350 10,300 200 10,250 200 300 <1> : 200 shares at 10,600KRW <2> : 200 shares at 10,600KRW Bid 100 Results of Trade Executions 10,250 200 <1> : 200 shares at 10,600KRW <2> : 200 shares at 10,600KRW Bid 500 Results of Trade Executions

* , refers to sequence of quotations received by the exchange.

* , refers to sequence of quotations received by the exchange.

1. Market Management
(1) Temporary Market Suspension (Circuit Breakers)
A. Background Most Exchanges adopt Circuit Breaker (hereinafter CB) system to temporarily suspend the trading in the market when the benchmark index drops below certain level. Purpose of this measure is to provide coolingoff period for market participants in times of sudden market downfalls.

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In times of sudden market downfalls, there are possibilities of investors overreacting to the market direction rather than making rational decisions based on corporate fundamentals. For that reason, the CB system was also adopted in KRX Stock Markets37) as a complementary price stabilizing measure to the daily price limitations (which had been extended to 15% from 12%). B. Rule Application (25 KOSPI; 39 ER KOSPI / 26 KOSDAQ; 31 ER KOSDAQ) CB will be triggered when KOSPI index (KOSDAQ index in case of KOSDAQ Market) falls by more than 10% from the closing value of previous day for at least 1 minute. CB mechanism is intended to prevent overreaction on sudden market downfalls, thus, it is not triggered when the benchmark index rises by more than 10%. Triggering of CB is limited to once per day to prevent frequent trading suspensions which may bring further uncertainties in the market. Also CB is not triggered during last 40 minutes of the regular session (from 14:20 to 15:00). The market, at all time, should be closed as scheduled to minimize the investors potential losses from unexpected market closure. When CB is triggered, trading of all listed securities (excluding debt securities) in the stock market and trading of equity related derivatives products in the KRX Derivatives Market shall be suspended for 20 minutes. During this period, new trading quotations can not be submitted to the Exchange but market participants may cancel existing quotations. Trading will resume when 20 minutes suspension period expires. After the trade resumption, new quotations will be received for 10 minutes to determine the initial price through Call Auction method. After having determined the initial price at 30 minutes from the triggering of CB, trades will be executed under the Continuous Auction method.

37) Introduced on Dec. 7th 1998 for KOSPI Market and on Oct. 15th 2001 for KOSDAQ Market

Cases of Circuit Breakers in Effect

Date (Market) External Factors

Apr. 17th 2000 (KOSPI) Sep. 18 2000 (KOSPI) Sep. 12 2001 (KOSPI) Jan. 23 2006 (KOSDAQ)
th rd th th

Black Friday in the U.S. markets (Dow and Nasdaq index fell 5.56% and 9.67%, respectively) Sharp downfalls in the U.S. markets; failure in acquisition of local automaker; surge in crude oil prices 9.11 terrorist attack in the U.S. Sharp downfalls in the U.S. markets; plunge of local thematic stocks

Aug. 16 2007 (KOSDAQ) Crisis in the U.S. subprime mortgage market Oct. 23rd 2008 (KOSDAQ) Global Financial Crisis Oct. 24 2008 (KOSDAQ) Economic Recession led by the Global Financial Crisis
th

(2) Trading Halts of Individual Issues (26 KOSPI / 25 KOSDAQ)

A. Trading Halts When there is a need to bring relevant corporate information to investors attention due to prevailing rumors about a company or when it is deemed that normal trading is not possible due to instant concentration of trading orders, the Exchange may halt the trading of concerned issue temporally to facilitate orderly trading in the market. Trading Halts of an issue will be triggered when; price or trading volume of an issue fluctuates drastically or is expected to fluctuate drastically due to prevailing rumors about the issued company on any one of following matters; speculation that Promissory Notes or Credit Checks issued by the company are dishonored (bankrupted); speculation that the companys banking transaction has been suspended or halted;

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 speculation that the companys business has been suspended in whole or in part; speculation on bankruptcy, liquidation, filing for corporate workout program (either by a court order or an agreement among creditors) or de facto in workout program; speculation that the Auditor has written Adverse Opinion, Disclaimer Opinion, or Qualified Opinion on the upcoming annual Audit Report; speculation that the companys capital impairment ratio will be more than 50% on the upcoming Audit Report; speculation that Auditor has written Adverse Opinion or Disclaimer Opinion on semiannual report; and any other important matters there is a heavy concentration of orders to cause; trade execution delays for more than 5 minutes at the point where 10 minutes have passed from the first recognition of execution delays of more than 10 minutes; or trade execution delays of more than 20 minutes.
Ex) Trading Halt for Trade Execution Delays

it is deemed necessary for stable market operation such as when; Market Oversight Commission requests trading halts for those designated as InvestmentRisk issues; there is important disclosure that may have significant impact on the issue (such as M&A); the issue is designated as Unfaithful Disclosure Company; and etc.

When Trading Halt has been triggered, relevant Certificate of Subscription Rights, Subscription Warrants, or ELWs having concerned issue as an underlying asset may also be halted for trading. B. Trade Resumption In case of a Trading Halt based on market rumors, trading will resume 30 minutes after the provision of responsive disclosure by the company38). If the companys disclosure is made before the opening of regularsession, trading will resume 30 minutes after the market open. And if the companys disclosure is made during last 60 minutes of the regularsession, trading will resume on the next trading day. In case where rumors continue even after the responsive disclosure or in case where information in the responsive disclosure comes under the criteria for delisting or Administrative Issue, trade resumption may be postponed. In case of Trading Halt based on heavy concentration of trading orders, trade resumption time will be determined by taking into account of market conditions and quotation conditions.

(3) Exdividends and Exrights (132 ER KOSPI / 53 ER KOSDAQ)

A. ExDividends Exdividend is a market notification that investors purchasing Exdividend shares will not have the rights to receive forthcoming dividend from the concerned company. KRX makes appropriate price adjustment on the exdividend date when there is a need to reflect the change in share value. Investors who have purchased the shares will become a shareholder of the company when shares are delivered to those investors on the settlement date (T+2). Thus, ex dividend date shall be 1 trading day prior to the Confirmation Date39) for listing of
38) According to the Disclosure Regulation, when KRX rquests for a responsive disclosure on such influential rumors, the company has to respond within 1 day.

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shareholders who will have rights to upcoming corporate actions (hereinafter Book Closure Date). If the Book Closure Date is in middle of Trading Halts on the companys shares (excluding the first day of the trading halt), trade resumption day becomes the exdividend date.
Ex) Exdividend date for Companies with the Fiscal Year ending on December 31
12/28
Closing price of cum dividends
st

12/29
Ex-dividend date

12/30
Last trading day of the year

12/31
Trading Holiday (Book Closure Date)

1/1
Trading Holiday

1/2
Settlement date for trades on ex-dividend date

In case of companies issuing Stock Dividend, baseprice of the companys shares are adjusted on the exdividend date to reflect changes in value of each shares.
Calculation of BasePrice for ExDividend Issues
(Closing price of cum dividends Number of shares before the dividend) / Number of shares after the dividend

There is no baseprice adjustment for cash dividends because the amount of cash dividends will be determined at the shareholders meetings which are mostly held in March of following year. However, in case of planning on stock dividends, such companies have obligation to disclose the expected amount before the end of fiscal year. B. ExRights Exright is a market notification that investors purchasing Exrights shares will not have the rights to subscribe for upcoming issuance of new shares from the concerned company. Exrights will be applied when companies are issuing new shares to existing shareholders for capital increase.

39) Confirmation date for shareholders shall be predetermined (and disclosed) by the company. Normally, companies designate last business day of the fiscal year as the confirmation date.

Similar to exdividend date, taking into account of the settlement schedule, exrights date is 1 trading day prior to the Book Closure Date. Therefore, in order to have subscription rights, investors have to purchase the companys shares at least 2 days before the Book Closure Date. Accordingly, baseprice for exrights issues shall be adjusted to reflect changes in value of a share caused by the capital increase from existing shareholders.
Calculation of BasePrice for ExRights Issues
{(Closing price of cum rights Number of shares before the capital increase) + amount of paidin capital increase40)} / Number of shares after the capital increase

(4) Administrative Issues

A listed company will be designated as an Administrative Issue in the market if the concerned company falls under the criteria for possible delisting in near future. Those criteria include deterioration of financial conditions, limited share distribution, lack of liquidity ratio, etc., and the details are described in KRX Listing Regulations41). KRX designates Administrative Issues as an alert to investors and also to provide a grace period for the company so that it can make necessary efforts to prevent delisting in the market. A. Trading Method for Administrative Issues (23 KOSPI / 28 ER KOSDAQ) In the KOSPI market, there is no different trading method for Administrative Issues. However, in the KOSDAQ market, periodic (every 30 minutes) Call Auction method will be applied to Administrative Issues during the regular session. This approach in the KOSDAQ Market is to prevent irrational trading activities (speculations) and to minimize the volatility of stocks under unfavorable conditions.
40) Amount of paidin capital increase shall be 0 when new shares are issued without consideration (with no payment requirement). 41) 75 of KOSPI Market Listing Regulation and 28 of KOSDAQ Market Listing Regulation

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B. Trading Method for Liquidation Issues (20, 38 KOSPI; 56 ER KOSPI / 23

KOSDAQ; 28 ER KOSDAQ)

When delisting of a security has been determined, it will be provided with the last opportunity of trading in the exchange markets. This liquidation session will be limited to 7 trading days. During the regular session (9:00 ~ 15:00), periodic (every 30 minutes, 13 times a day) Call Auction method will be applied for trading Liquidation Issues. During offhours session (and including regular session block trading), there is no different trading method applied to Liquidation Issues. Regardless of market sessions, Liquidation Issues will not be applied with daily price limitations42).

(5) Investment Warning System

Market Oversight Commission (hereinafter MOC) runs Investment Warning System43) to alert investors of securities issues having possibility of speculative or illegal trading activities. MOC will make 3 step warnings (InvestmentCaution, InvestmentAlert, and InvestmentRisk) on Stocks, KDRs, and ETFs to prevent further engagement of abusive trading activities and to minimize excessively reactive trading behaviors. A. Warning Criteria44) InvestmentCaution: designated when a security is experiencing heavily concentrated trading from few Member branches or from few Accounts, or etc.

42) For blocktrading of Liquidation Issues, price range of regular session block trading will be applied accordingly. See III5 for description on BlockTrading. 43) To enhance the effectiveness of this warning system, the Market Oversight Regulation has adopted previous abnormal price fluctuations warnings on Sep. 3rd 2007. 44) Described in Article 3, 33, 34 of Enforcement Rule on Market Oversight Regulation.

 InvestmentAlert: designated when a security comes under following criteria

Criteria In Specific

Shortterm Price Surge

(Preliminary Warning) when price increases by more than 75% during last 5 days (Warning) when above condition lasts for 2 consecutive days and nd meeting following 2 conditions on this 2 day; closing at the highest closing price in last 20 days; and the concerned Issues 5day price increase rate is more than 6 times that of KOSPI index (KOSDAQ index in case of KOSDAQ listed issues) (Preliminary Warning) when price increases by more than 150% during last 20 days (Warning) when above condition lasts for 2 consecutive trading nd days and meeting following 2 conditions on this 2 day; closing at the highest closing price in last 20 days; and the concerned Issues 20day price increase rate is more than 4 times that of KOSPI index (KOSDAQ index in case of KOSDAQ listed issues)

Mid to LongTerm Price Surge

(Preliminary Warning) when the issue, during last 20 days, has been designated as InvestmentCaution for more than 5 times while having price increase of more than 100% Repetition of (Warning) when above condition lasts for 2 consecutive days and Investment nd meeting following 2 conditions on this 2 day; Caution closing at the highest closing price in last 20 days; and Warnings the concerned Issues 20day price increase rate is more than 3 times that of KOSPI index (KOSDAQ index in case of KOSDAQ listed issues) Others (Warning) when lifted from InvestmentRisk warning

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 InvestmentRisk: designated when an InvestmentAlert issue comes under following criteria

Criteria In Specific

Shortterm Price Surge

Having 5 days passed since the designation as an InvestmentAlert issue, (Preliminary Warning) when price increases by more than 75% during last 5 days (Warning) when above condition lasts for 2 consecutive days and nd meeting following 2 conditions on this 2 day; closing at the highest closing price in last 20 days; and the concerned Issues 5day price increase rate is more than 6 times that of KOSPI index (KOSDAQ index in case of KOSDAQ listed issues) Having 20 days passed since the designation as an Investment Alert issue, (Preliminary Warning) when price increases by more than 150% during last 20 days (Warning) when above condition lasts for 2 consecutive days and nd meeting following 2 conditions on this 2 day; closing at the highest closing price in last 20 days; and the concerned Issues 20day price increase rate is more than 4 times that of KOSPI index (KOSDAQ index in case of KOSDAQ listed issues)

Mid to LongTerm Price Surge

B. Sanctions and Lifting of Warnings Any securities issues designated as InvestmentAlert or InvestmentRisk shall not be eligible for credit transactions45) (meaning Members can not provide lending facility for those securities) and Members are required to collect 100% margin when investors are entrusting trading orders on those securities. In addition, securities issues having InvestmentRisk warning can not be used for sub-

45) Article 430 of Regulation on Financial Investment Business.

stitution securities46) and the MOC may also request for Trading Halts when the share prices after the designation is higher than the preceding closing prices for 2 consecutive days. 10 days after the designation, InvestmentAlert warnings or InvestmentRisk warnings will be lifted when the concerned security does not fall under any of shortterm or mid to longterm price criteria.

(6) Program Trading Quotations

A. Definitions Program Trading generally refers to a computerdriven trading method. Having diverse investment strategies programmed to a computer system, it will assess realtime market data and spot just the right market condition to instruct series of orders to be routed automatically. These technical methods enable investors to make fast and accurate (minimizing human errors) transactions to meet the intended investment strategies. For transparent market operation purposes, current KRX Business Regulations define Program Trading as following type of investment strategies (16 KOSPI / 2
KOSDAQ);

i.

Index Arbitrage Trading is defined as set of trading activity which includes buying (or selling) basket of constituent stocks in KOSPI200 index (KOSTAR index in case of KOSDAQ Market, hereinafter the same in this section) and selling (or buying) KOSPI 200 index futures or options47) for the purpose of gaining profits by taking advantage of instant price differences between KOSPI 200 constituent stocks and KOSPI 200 futures and options contracts.

46) See II4(3) for description of Substitution Securities. 47) According to the Regulation, set of buying and selling in this case does not have to be in simultaneous matter to be categorized as Program Trading.

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ii. NonArbitrage Trading is defined as either buying or selling basket of 15 or more constituent stocks in KOSPI index (basket of 10 or more constituent stocks in KOSTAR index in case of KOSDAQ Market) at the same time by the same investor. B. Backgrounds to Program Trading Regulations Due to its basic nature of trading behavior based on technical and systematical investment strategies, there are concerns that Program Trading may intensify market instability in times of high volatility. For instance, when massive sell or buy orders are placed at the same time by the trading programs which anticipate similar market conditions, market will be vulnerable to sudden price fluctuations. In this highly instable environment, the Market is unlikely to function well for efficient price discovery of listed securities. Furthermore, when there are large quantities of arbitrage positions open (unsettled) till the last trading day of relevant futures & options contracts, the Market is likely to experience high volatility led by pressure on investors to offset those open positions on the last trading day48). Therefore, Program Trading needs to be more transparent and regulated appropriately in times of sudden price fluctuations. C. Program Trading Quotations at Temporary Standstill (a.k.a SideCar)
(16 KOSPI; 20 ER KOSPI / 13 KOSDAQ; 14 ER KOSDAQ)

Sidecar, which temporally stops the validity of all Program Trading Quotations, is a market action to lessen the impact of Program Trading when the market is experiencing severe price fluctuations. In the KOSPI Market, sidecar is triggered when the price of KOSPI200 index Futures49) deviates by more than 5% from the futures baseprice for at least 1 minute.

48) Especially because KRX Derivative market is one of the most heavily traded derivatives market in the world (according to the statistics from FIA, Futures Industry Association). 49) The criteria will be based on most liquid futures contract which is usually the nearest month contract.

In the KOSDAQ market, sidecar is triggered when following 2 price conditions lasts for at least 1 minute; i. price of KOSTAR index Futures deviates by more than 6% from the futures baseprice; and

ii. the value of KOSTAR index deviates by more than 3% from its baseprice. When sidecar is triggered due to a price increase, validity of all bid program quotations will be suspended for 5 minutes, and vice versa to all ask program quotations when sidecar is triggered due to a price decline. The sidecar effect will be relieved when 5 minutes have elapsed from the triggering point or when it is 40 minutes before the regularsession market closing. In case where Circuit Breaker has been triggered while sidecar is in effect, the sidecar will be relieved when trading resumes from the suspension. D. Disclosure of Program Trading Quotations (130 ER KOSPI / 15 ER KOSDAQ) To increase the transparency of Program Trading in the market, Members are required to tag all program quotations (classified into Arbitrage Trading and Non Arbitrage Trading) before routing them to the Exchange (12 ER KOSPI / 7 ER KOSDAQ). Any market participants who intend to place (or to correct existing) program trading orders during the market closing Call Auction session (14:50~15:00) on the last trading day of the futures or options contracts, are required to report the Exchange in advance of the details of such intended quotations by 15 minutes before the market closing of the day. This reporting regime (a.k.a Sunshine Rule) is established to prevent potential manipulation of settlement price in the Derivatives market and to let investors be aware of high volatility. In addition, to provide more information on program trading status in the market, the Exchange discloses aggregation of daily Index-Arbitrage Trading balance (open positions) reported by the Members.

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(7) ShortSelling Regulations

A. Definitions ShortSelling in the market simply refers to selling of securities that seller does not own. In most securities market, shortselling is regulated to prevent settlement failures and also to minimize negative impacts (such as increasing the market volatility) of abusive shortselling in the market. In Korean stock markets, the FSCMA (180) defines ShortSelling as; i. A sale of listed securities which the seller does not own (naked shortselling); or

ii. A sale of listed securities with an intention to settle through borrowed securities (covered shortselling). The FSCMA is also clear on sales transactions that do not have the possibility of settlementfailure so to avoid unnecessary application of shortselling regulations in the market. According to the FSCMA, sales transactions shall not be deemed as Short Selling when; i. Selling purchased securities, within the purchased quantity, before the settlement date; ii. Selling stocks that will be acquired by exercising the rights of convertible bonds, exchangeable bonds, bonds with warrant, etc. and, thus, when it is possible to settle the account as sold stocks will be listed by the settlement date; and iii. Otherwise cases50) with no possibility of settlement failure on the settlement date

50) Details of the cases are described under the Enforcement Decree of the ACT.

Regulatory Framework on ShortSelling

Naked ShortSelling Covered ShortSelling

FSCMA (180)

Prohibited. Does not recognize sales transaction as a shortsell when the settlement is ensured (also described in the Enforcement Decree)

Allowed. States that KRX shall stipulate short selling procedures on its Business Regulations

Double confirmation of short selling and borrowed securities KRX Prohibited. Maintain records for at least 3 yrs Business Also describes detailed cases Checking availability of deliverable Regulations of sales transactions which stocks on the settlement date (17 KOSPI) shall not be recognized as short Uptick rule (92 KOSDAQ) selling Longsell Confirmation requirements Disciplinary Actions Penalties (sanctions or fines) against Members and investors who have breached the relevant laws & regulations

B. ShortSelling Procedures An Investor entrusting sales order to a Member; i. shall notify the Member of whether such sales order is a longsell or a short sell; and if it is a shortsell ii. shall indicate that its covered by confirming availability of the stock (confirmation shall be in the form of document, telephone, email, or any other electronic communication methods) A Member receiving sales order from a customer; i. shall double confirm (whether its a shortsell or a longsell and whether its covered with sufficient quantity of borrowed stocks) before routing it to Exchange trading system;

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ii. shall keep and maintain those confirmation information for at least 3 years and provide such information to the Exchange or regulators upon request; and iii. shall not be entrusted with covered shortselling orders or shall not route those shortselling orders to the exchange if such transactions are unlikely to be settled on T+2 Members may reject orders breaching relevant shortselling regulations (84 KOSPI /
40 KOSDAQ)

C. LongSell Confirmation For those investors who have no intention to make shortselling in the market, Members may not conduct double confirmation procedures on sales orders when following conditions are met; i. if the Member has received legitimate longsell confirmation from the customer that he/she will not make any shortselling trades in the market; and

ii. if the Member has implemented proper screening system to block any short selling orders from that particular customer D. Regulations after the ShortSelling (182 KOSPI / 94 KOSDAQ) On the settlement date, Members are required to verify those customers who lack in settlement balance51) (meaning customers inventory of securities is less than the amount of securities needed for the settlement) and receive relevant proof records (including Securities Borrowing and Lending contracts, etc.) from those customers to confirm whether he/she has breached the ShortSelling Regulations. Members shall keep and maintain these records for at least 3 years. If confirmed that the customer has breached ShortSelling Regulations for 2 times within 6 months period or when transaction amount relevant to the regulation breach is more than 1 bil. KRW, all Members must receive document of proof (SBL contracts

51) In this case, Members must collect 100% margin from the customer on every trades for next 90 days. See II4(3) for description on Special Margin Collection Rule

or Lenders written confirmation) before receiving shortselling orders from that particular customer for next 30 days. E. ShortSelling Ban

If there are concerns on market conditions that may undermine the market stability, KRX may ban covered shortselling in the market upon approval of FSC. F. Uptick Rule

All covered shortselling orders must be placed at a price (at least one tick) higher than the current market price of the securities being sold. As an exception to this Uptick Rule, shortselling orders can be placed at the current market price if the price is higher than the immediately preceding market price.
Ex) Exceptional case when shortselling order may be placed at the current market price Market Prices 10,000 9,980 9,980 9,990 9,990

Market participants may place shortselling orders at 9,990KRW immediately after the effective market prices of and .

In addition, Uptick Rule shall be exempt on shortselling orders with the purposes of; i. Arbitrage trading (through index derivatives, singlestock futures & options, ETFs, DRs); ii. Hedging by Liquidity Providers and Market Makers52); iii. Block trading; and iv. Sales of ETF

52) See III6 for description on Liquidity Providers. Market Makers perform similar roles in the Derivatives Market.

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(8) Correction of Members Transaction Errors (28 KOSPI / 27 KOSDAQ)

Members transaction errors occurred in the process of handling customer orders may be corrected to its original intentions upon request. KRX provides this facility of correcting transaction errors to enhance Members convenience in conducting brokerage businesses. A. Definitions Under the Business Regulations, Members Transaction Error is described as an error occurred by submitting quotations with inputs such as securities issues, quantity, price, or bid/ask classification that are different from customers original intention. And, because it is a Transaction Error, wrongly input quotations which have not been executed or quotations that have never been submitted shall not be subject to correction at the Exchange. B. Method of Correction In case of Members error occurred by wrong inputs on securities issues, quantity, price, or bid/ask classification, the concerned Member will assume (transfer) customers balance (position) to its own proprietary account. In case of Members error occurred by wrongly classifying customer account from proprietary account or vice versa, correction shall be made by transferring the balance to the originally intended account. C. Procedure of Correction When transaction error occurs, Members may submit an application for correction (through electronic network) by 15:00 of the day following the error. Upon receiving of an application, the Exchange will confirm the correction and reflect the change in the daily settlement process.

4. Special Cases of Trade Executions

(1) Determination of the BasePrice for IPO Stocks (30 ER KOSPI /
Annex 1 of ER KOSDAQ)

A. Price Determination Method Baseprice of initially listed shares (including KDRs) on the first trading day is determined by Call Auction method with quotations received before the market open (08:00 ~ 09:00). In this special case, quotations shall be received within the specified price range as following; i. for Common Stocks, 90%~200% of the appraisal price;

ii. for Preferred Stocks, 50%~200% of the appraisal price; and iii. in case where net asset value per share is used as the appraisal price, 50% to 200% of the appraisal price Once the baseprice has been determined, the issue in subject will be traded in accordance with the Continuous Auction method within the upper and lower price limitations set from the newly determined baseprice. Similarly, in cases of the relisting, change in share structure, capital reduction, and etc., the baseprice on the first trading day of the issue is determined by call auction method within specified price range. B. Appraisal Price (Annex 1 of ER KOSPI / Annex 1 of ER KOSDAQ) As mentioned above, appraisal price of a security is used as a basis to price range of quotations received in determining the first baseprice of initially listed shares, relisted shares, and etc.. If concerned issue already has the price evaluated by numerous market participants (e.g., public offering price, closing price in the KOSDAQ Market), such price shall be used as the appraisal price. When the issuing company undergoes a structural change (e.g., spinoff, merger), theoretical price shall be used as the appraisal price. In case

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where there is no objective appraisal standards (such as theoretical price), issuing companys net asset value per share shall be used as the appraisal price.

(2) Trading of Treasury Stocks

A. Acquisition of Treasury Stocks in Korea Treasury Stocks refer to stocks held in custody under the company that issued the stock. In Korea, the Commercial Act limits companies acquisition of treasury stocks to very exceptional cases such as retiring of stocks, merger, transfer of business, exercise of rights, handling of fractional shares, and stock buyback claims. However, the FSCMA generally allows listed companies to acquire treasury stocks without having restrictions on acquiring purposes. Nonetheless, the FSCMA regulates source of purchasing fund and purchasing method to prevent excessive holding of treasury stocks (1652, 1653). Through the purchase of treasury stocks, listed companies can reduce outstanding (freefloat) shares and, thus, increase the shareholders expectation on higher dividend. Also, companies would acquire treasury stocks to use them as a protection measure against hostile takeovers or as employee benefits (stock options).53)

53) Basically, these reasons were background to amendment of Securities Exchange ACT (now replaced by the FSCMA) in April 1994. This amendment was also in line with removing of regulations on shareownership cap in the Securities Exchanges Act.

B. Regulations on Purchasing/Sales of Treasury Stocks

Principles of the Regulation
Treasury Stocks shall be purchased only through the Exchange market or by the means of tender offer. This is to prevent purchasing treasury stocks from affiliated persons and to ensure participation of common shareholders in this selling opportunity. Funding sources for purchasing of treasury stocks shall be strictly limited to preclude ineligible companies from taking advantage of this system. Purchasing process shall be transparent through comprehensive reporting and disclosure regime.

Currently, there are no limitations on purchasing quantity (i.e. theoretically, a listed company can repurchase all outstanding shares, provided that it has sufficient funds in source).54) Funding Source (511 of Regulation on Securities Issuance and Disclosure): total amount of fund that Company can use for purchasing treasury stocks is limited to; (maximum dividend amount pursuant to the Commercial Act and based on financial statement of previous fiscal year) (aggregated purchase amount of treasury stocks, including the treasury stocks purchased through trust contracts, since the end of previous fiscal year) + (aggregated sales amount of treasury stocks, including the treasury stocks sold through trust contracts, since the end of previous fiscal year) (total dividend amount determined at the general shareholders meeting) In case of purchasing treasury stocks for profit retirement purpose, total amount of the fund is limited to; (Amount of profit available for dividend pursuant to the Commercial Act and based on financial statement of previous fiscal year) (revaluation reserve) (corporate development reserve) (corporate rationalization reserve) (corporate structure improvement reserve) (amount of trust contracts for purchasing treasury stocks)

54) Limitation on purchasing quantity of treasury stocks has been abolished on May 25th 1998. Prior to this deregulation, purchasing of treasury stock was limited to 1/3 of total shares issued.

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 Purchasing Method (1652 of the FSCMA): treasury stocks shall be purchased only through the Exchange market or by the means of tender offer. In addition, treasury stocks can be purchased indirectly through a trust contract. Purchasing (Sales) procedures: i. When listed companys BOD has decided on purchasing/sales (including by the means of trust contracts) of treasury stocks, the company is required to make the disclosure on that day and provide the report on purchasing/sales plan to the FSC by the day following the decision (161 of the FSCMA). ii. The company shall start the purchasing or sales of treasury stocks on the day after the disclosure of BOD decisions and complete the purchase within 3 months period. (1762 of Enforcement Decree of the FSCMA). iii. When purchasing/sales of treasury stocks have been complete or when purchasing/sales period has been expired, the company shall provide FSC with the report on the results of purchasing/sales of treasury stocks within 5 days period. C. Regulations on Trading Treasury Stocks at KRX Stock Markets Trading of Treasury Stocks in the Exchange market needs to be regulated to minimize the impact on market prices and to avoid the possibility of unfair trading such as misuse of insider information. Method of Trading Treasury Stocks (39 KOSPI; 57 ER KOSPI / 10 KOSDAQ;
10 ER KOSDAQ)

i.

A listed company must first open a separate account for trading treasury stocks at any securities companies. No other securities issues, except for treasury stocks, can be traded through this special account. (79 KOSPI; 106
ER KOSPI / 35, 36 KOSDAQ)

ii. A Member, having entrusted trading orders on treasury stocks, must submit an Application for Trading Treasury Stocks to KRX 1 day prior to the planned trading day and within the period from the market close (15:00) to 18:00.

iii. On the trading day (the day following the submission of the application), new quotations or correction on existing quotations may be submitted to KRX during the regulartrading session, but new quotations or correction quotations can not be placed during last 30 minutes of the regular session. iv Quotations to trade treasury stock shall be within following price range;
Bid Quotations Ask Quotations

Submitted during 08:00~09:00

Previous days closing price ~ Previous days closing price ~ 2 ticks less than the closing 105% of the closing price price

Ceiling: Higher price between the highest price of the day and lower price between the imprice of the best bid quotation Submitted mediately preceding market during regular Floor: 10 ticks less than the price and price of the best ask trading session higher price between the quotation ~ 10 ticks higher (09:00~15:00) immediately preceding market than the lower price price and price of the best bid quotation
* For the securities issues which had no transactions (no market price) before the submission of quotations to trade treasury stocks, the baseprice shall be deemed as the highest market price of the day and immediately preceding market price.

v. Maximum quantity of treasury stocks that can be traded in a day shall be less than 1% of total number of outstanding shares issued and the higher quantity between; 10 % of planned purchasing/sales quantity in the report; and 25% of the stocks average daily trading volume in recent 1 month period Trading of Treasury Stocks through a Trust Contract i. In the past, trading of treasury stocks by entering into a trust contract was not regulated, but since December 1st 2003, the same regulations on direct purchasing/sales of treasury stocks have been applied to the Treasury Stock Trusts as well. However, considering the nature of Trusts, daily limitations

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on trading quantity is extended to 1% of the total number of shares outstanding. ii. Also, to prevent frequent purchasing/sales of treasury stocks using trust contracts, sale of treasury stock is prohibited when 1 month period has not been passed since the purchase (based on final purchasing day) and vice versa to purchasing of treasury stocks. (106 of the FSCMA) Trading of Treasury Stocks through OffHours Block Trading Facility (35
KOSPI / 21 KOSDAQ)

i.

Sales of treasury stocks can also be conducted through KRX offhours block trading facility. However, in this case, price range for trading is limited to 5% of the days closing price (for blocktrading in prehours session, closing price of the previous day shall be applied).

ii. Purchasing of treasury stocks through KRX offhours block trading facility is only allowed for cases where stocks are purchased from governmental bodies or purchased under the government instruction/recommendation and FSC approval. In these cases, same price range as offhours block trading session will be applied. However, no price range (and no daily price limitations) shall be applied in cases of purchasing treasury stocks from the government or from the Korea Deposit Insurance Corporation under the FSC approval. iii. Although daily quantity limitation is not applied to trading of treasury stocks through KRX offhours block trading facility, requirement on submitting an application one day prior to the trading day does remain intact. Exceptions to Trading Treasury Stocks (40 KOSPI / 11 KOSDAQ) i. KRX may impose temporary exceptions for trading treasury stock, upon FSC approval, when deemed necessary to maintain orderly market operation in times of sudden change in market conditions.

ii. When this exception is imposed55), daily purchasing quantity limitation will be extended to entire purchasing quantity planned in the report.

5. Alternative Trading Methods

(1) Regularsession Block Trading (including basket trading)
A. Background Block trading (including basket trading, hereinafter the same) is an alternative trading method provided by the Exchange to execute pair of bid and ask orders on individual stocks or basket of stocks based on conditions negotiated between the parties outside the market. In response to growing demand on largelot trading in the market, KRX has introduced56) regularsession block trading to supplement existing offhours block trading facility. This new system not only enhances the convenience of market participants, but also, enables KRX to conduct stable market operation by separating large lot orders from normal auction orders. Block trading quotations are placed through internet based KBloX system provided by KRX. Although, in most cases, block trading conditions are negotiated outside the market between parties, such negotiations (and searching for counterparities) can also be conducted through KBlox system.

55) Previously, this exception was imposed during the period from Sep. 21st 2001 to Mar. 20th 2002 st st (market impacts after the 9/11 terror in the U.S.) and the period from Oct. 1 2008 to Mar. 31 2009 (period of global financial crisis). 56) Introduced in Mar. 2005 for the KOSPI Market, and in Apr. 2006 for the KOSDAQ Market

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KBlox
KBlox is an internet based network system that provides functions such as counterparty searching, trade negotiations, and trade application which are necessary for conducting block/basket trading in the market. It runs from 07:00 to 19:00 and it is accessible by Members with given ID and password. KBlox accommodates following types of trade; (1) Crossing : single Member submits both bid and ask quotations on behalf of its customers (2) Counterparty Trade: Members on each side of the trade submit applications by designating the counterparty (Member) and entering in predetermined trade conditions (3) Open Trade: A Member (or its customer) may search for counterparties by exposing its trading intentions (issue, price, quantity) on the board. Further negotiations on the conditions shall be made with potential counterparties who have shown interest in the trade.

B. Trading Conditions (31, 32 KOSPI; 49, 50 ER KOSPI / 192 KOSDAQ)

Securities eligible Equities, DRs, and ETFs for trading * excludes those issues having no transactions in the regularsession Trading Hours Price Range Order Types 09:00 ~ 15:00 Within the highest and the lowest market prices of the day established before placing the order Pair of bid order and ask order with matching conditions (e.g. price and quantity) Block trading: KOSPI Market: at least 500 times the trading unit or trading value of 100 million KRW. KOSDAQ Market: trading value of at least 100 million KRW Basket trading: basket of at least 5 issues and total value of 1 billion KRW At the price predetermined by the buyer and the seller Correction and Cancellation of orders are allowed before the execution 1 share One of either buying or selling partys order must be placed through a single member

Minimum Order Size

Execution Price Order Condition Trading Unit Member Condition

(2) Offhours Trading

KRX runs offhours trading session to provide investors with extra trading opportunities even before and after the regular session. In terms of trading method, off hours session is divided into closing price trading session, block/basket trading session, and periodic call auction session.
Timetable for Offhours Sessions
Trading Hours Quotation Receiving Hours Trading Method

Prehours Session Afterhours Session

07:30~08:30 15:10~15:30 15:30~18:00 15:10~18:00

07:30~08:30 15:00~15:30 15:30~18:00 15:00~18:00

closing price trading; block trading; basket trading closing price trading Periodic call auction block trading; basket trading57)

A. Offhours Closing Price Trading (34 KOSPI; 51 ER KOSPI / 20 KOSDAQ; 23 ER

KOSDAQ)

Offhours closing price trading session provides extra trading opportunities for those investors who were unable to make the trade during closing price call auction session. In this session, securities issues are traded at the closing price of the regular session. KRX will execute, based on principle of time priority, matching quantity of those bid/ask quotations (received during this session) at the closing price of the respective issue. Securities eligible Equities, DRs, and ETFs for trading * excludes those issues having no transactions in the regularsession Execution Price
Closing price of the day (closing price of the previous day in case of prehours session) Correction and Cancellation of orders are allowed before the execution 1 share

Execution Method Bid and ask quotations are matched according to the time priority Order Conditions Trading Unit

57) KOSDAQ Market does not offer Offhours basket trading facility.

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B. Offhours Periodic Call Auction Trading (342 KOSPI; 512 ER KOSPI / 212
KOSDAQ; 252 ER KOSDAQ)

In this session, KRX receives quotations and executes them through call auction method at every 30minutes interval point. It was introduced on May 30th 2005 to accommodate the functions of ECN market which was closed down due to lack of liquidity.
Securities eligible Equities, DRs, and ETFs for trading * excludes those issues having no transactions in the regularsession Price Range Execution Method Order Conditions Trading Unit Within 5% of the closing price and the daily price limitations Call auction at every 30minutes interval point with quotations received from 15:30 to 18:00 (total of 5 times) Correction and Cancellation of orders are allowed before the execution 1 share

C. Offhours Block/Basket Trading (35~36 KOSPI; 52~54 ER KOSPI / 21 KOSDAQ; 24

ER KOSDAQ)

Block/basket trading facility is also available during offhours session. Trading method is same as that of regular session block/basket trading except for trading hours and the price range. Securities eligible Equities, DRs, and ETFs for trading * excludes those issues having no transactions in the regularsession Trading Hours Price Range Order Types
15:10 ~ 18:00 and 07:30 ~ 08:30 Within the daily price limitations Pair of bid order and ask order with matching conditions (e.g. price and quantity) Block trading: KOSPI Market: at least 500 times the trading unit or trading value of 100 million KRW. KOSDAQ Market: trading value of at least 100 million KRW

Minimum Order Size

 Basket trading: basket of at least 5 issues and total value of 1 billion KRW

Execution Price Order Condition Trading Unit Member Condition

At the price predetermined by the buyer and the seller Correction and Cancellation of orders are allowed before the execution 1 share One of either buying or selling partys order must be placed through a single member

6. Liquidity Providers
(1) Basic Concept
Liquidity Providers (hereinafter LPs) continuously place bid and ask quotations on issues with lack of liquidity to facilitate stable price discovery in the market. In most cases, issues with lack of liquidity incur higher transaction cost and higher risk for investors which leads to unstable (mostly in discounted level) price developments. Therefore, LP system was introduced58) to supplement those shortcomings. When a securities company (Member) enters into an LP Agreement with a listed company whos shares are experiencing lack of liquidity, based on provisions of the Agreement, the Member is obliged to place liquidity providing quotations on the issue and the listed company is to compensate the Member for the LP service. Basically, when the spread (price difference between the best bid and the best ask quotations) of an issue widens to a certain level, LP will place specified quantity of bid/ask quotations to reduce the spread.

58) Introduced in Jan. 2006 for KOSPI Market and in Jan. 2008 for KOSDAQ Market. LP services are available for ETFs and ELWs as well.

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LP Structure

(2) Rules and Regulations on LPs (202 ~ 206 KOSPI / 122 ~ 126
KOSDAQ)

A. Qualifications of the LP To be qualified for the LP, securities company need; i. to have KRX Clearing Membership and a license for Investment Dealing Business;

ii. to appoint a person (staff) responsible for the LP service; and iii. to have passed at least 1 year since its effect when the company was given the lowest grade for 3 consecutive times in the quarterly LP performance assessment or when significant sanctions (such as business suspension or criminal penalty) were imposed on the company for breaching relevant laws and regulations. B. Obligations of the LP LPs are obliged to carry out their services according to the conditions stipulated in the LP Agreements. And these service conditions shall be determined by the LP and the issuing company provided that such conditions meet the minimum standards set by the Exchange. i. When the bid and ask spread exceeds specified percentage level stipulated in the Agreement (within 3% in the KOSPI Market and within 2% in the KOSDAQ Market), LP is obliged to submit, within 5 minutes, both bid and ask quotations that can reduce the spread.

ii. Size of LP quotations shall be at least 5 times the trading unit (10 times, in case of KOSDAQ Market) of the issue. iii. LPs shall be exempted from above obligations when; spread is less than the specified percentage level stipulated in the Agreement; there is no available tick size that can reduce the current spread; quotation receiving hours for call auction is in effect and for 5 minutes after the end of that quotation receiving hours; specified in the Agreement that LPs obligation will be exempt when LPs trading volume or shareholding rate exceeds certain level; quantity of shares held by the LP is less than the minimum LP quotation size, exemption shall be applied to ask quotations; and etc. C. Method of Placing LP Quotations LP quotations shall be submitted only through the special LP account. When LPs obligation comes into effect, the concerned LP must place either bid or ask quotations first and then immediately place the counter side quotation. The first quotation shall be placed at any prices between the best bid and best ask quotations. However, when intending to place the bid quotation first, the LP can place the bid quotation at the best bid price. Likewise, LP can place the first ask quotations at the best ask price. Counter side quotation following the first obligatory quotation shall be placed at any prices within the range of 3% (2% in case of the KOSDAQ Market) from the price of the first quotation. Thus, LP quotations can not be matched with existing quotations in the market but are matched only with quotations placed after the LP quotations.

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EX) LP submits Ask Quotation as the first Obligatory Quotation

Ask Price Bid Ask Price Bid

100

10,450 10,400 10,350 10,300 10,250 10,200 10,150 10,100 10,050 10,000 9,900

100

(LP Quotation) 50

100

10,450 10,400 10,350 10,300 10,250 10,200 10,150 10,100 10,050 10,000 9,900

100

Best ask quotation is at 10,400KRW and best bid quotation is at 10,000KRW, thus the spread ratio exceeds 3% and the LPs obligation comes into effect. LP can place the first ask quotation at any prices ranging from 10,400KRW (the best ask price) to 10,050KRW (1 tick + the best bid price).

If the LP places an ask quotation at 10,200KRW, counter (bid) quotation shall be placed at any prices ranging from 10,150KRW (LPs ask quotation 1 tick) to 9,900KRW (within 3% range of the best ask price)

EX) LP submits Bid Quotation as the first Obligatory Quotation

Ask Price Bid Ask Price Bid

100

10,450 10,400 10,350 10,300 10,250 10,200 10,150 10,100 10,050 10,000 9,900

100

100

10,450 10,400 10,350 10,300 10,250 10,200 10,150 10,100 10,050 10,000 9,900

(LP Quotation) 50 100

Spread ratio exceeds 3% and the LPs obligation comes into effect. LP can place the first bid quotation at any prices ranging from 10,350KRW (the best ask price 1 tick) to 10,000KRW (the best bid price).

If the LP places bid quotation at 10,050KRW, counter (ask) quotation shall be placed at any prices ranging from 10,100KRW (1 tick + LPs bid quotation) to 10,350KRW (within 3% range of the best bid price)

D. Supervision and Management of LPs KRX conducts regular monitoring of LP activities to ensure fair trading practices in the market. KRX also conducts quarterly performance assessment of LPs on aspects such as contribution to spread improvement, fulfillment of LP obligations, and timely placement of LP quotations. These assessments will be disclosed for public information and those LPs given the lowest grade for 3 consecutive quarters shall be suspended from LP business for at least 1 year. When entering into a new LP Agreement or when having important changes to the Agreement, the LP shall inform such matters to KRX within 3 days. Changes in the staff responsible for LP services or changes in exemptions to LP obligations shall be also notified to KRX.
Different Conditions Applied for ETF and ELW LPs
In case of ETF LPs; LP quotations can be matched and executed with existing quotations in the market. LP qualification: an Authorized Participant which has KRX Clearing Membership and a license for Investment Dealing Business. Obligatory spread: within 2% for ETFs tracking domestic index and within 5% for ETFs tracking overseas index (in KOSDAQ Market, obligatory spread shall be within 10 times the tick size). Minimum LP quotation size: for KOSPI Market, 100 times the trading unit; and for KOSDAQ Market, 1,000 times the trading unit. In case of ELW LPs; LP quotations can be matched and executed with existing quotations in the market; LP qualification: a securities company which has KRX Clearing Membership and a license for Investment Dealing Business on securities & OTC derivatives. Obligatory spread: within the percentage level reported by the issuer. Minimum LP quotation size: for ask quotations, 10 times the trading unit; and for bid quotations, 10 times the trading unit with minimum value of 5,000KRW.

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Clearing & Settlement

1.

Concept of Clearing and Settlement

2. Clearing & Settlement Process 3. Risk Management 4. Handling of Settlement Failures

1. Concept of Clearing and Settlement

(1) Introduction
Every trade in stock markets will be officially complete when both settlements between the investor and the securities company (clearing member) and settlements between the clearing member and the Exchange are complete. In KRX securities markets, listed securities are settled on T+2 (2 business days after the trading day) while Government Bonds are settled on T+1 and Retail Bonds & REPO Bonds on the trading day (T). Since very large number of participants trade financial securities continuously and repetitively in stock markets, settlement process needs to be stable and efficient enough to enhance the reliability of daily market operation. On this background, KRX has also established diverse systematic tools and infrastructures to facilitate stable and efficient settlement process for its stock markets.

(2) Clearing
A. Concept Clearing refers to series of processes that Central Counter Party (CCP), which assumes rights and liabilities of clearing Members to become legal counter parties to both sellers and buyers (clearing members) in the market, performs to instruct settlement obligations by netting the settlement obligations between sellers and buyers (i.e. between clearing members and the CCP) and to guarantee the settlement until its complete. Accordingly, if a clearing member fails to settle a trade, the CCP conducts the settlement failure process (such as implementing responsive actions against the member, use of guarantee funds, taking the responsibility to complete the settlement, and etc.) in accordance with relevant laws and regulations.

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Settlement without CCP direct settlement between clearing members

Number of selling parties (members) : 5 Number of buying parties (members) : 10

Maximum of 50 Settlements

Settlement with CCP indirect settlement between clearing members

Number of selling parties (members) : 5 Number of buying parties (members) : 10

Maximum of 15 Settlements

B. KRX takes the role of CCP in Korean Stock Markets According to the FSCMA (378), KRX, as a clearing institution in Korean stock markets, shall perform transaction confirmation, assuming of members settlement liabilities, netting of settlement obligations, confirmation of settlement obligations (payment amounts and deliverable securities), guaranteeing of settlements, handling of settlement failures, and instruction of settlement obligations. In addition, the FSCMA states that, in order for KRX to perform the role of CCP, KRX shall;

i.

specify the methods and other matters relevant to settlement process on its Business Regulations (393);

ii. require clearing members to contribute in Joint Compensation Fund59) (394); iii. appropriate Members margin and fiduciary deposits to cover liabilities in cases of settlement failures (397); iv. be responsible for covering the losses incurred by members settlement failures (399); and v. have priority over other creditors of the claims on Members assets when covering the losses incurred by the Members settlement failures (400) KRX assumes Members settlement liabilities according to KRX Membership Regulations (21), KOSPI Market Business Regulations (73), and KOSDAQ Market Regulations (29).

(3) Settlement
Settlement, which is the final process of a transaction, refers to cash payments and delivery of securities between CCP and clearing members based on settlement obligations confirmed through the clearing process. In KRX markets, delivery of securities is carried out by the method of bookentry transfer at KSD (Korean Securities Depository) and cash payments are carried out through settlement banks (Bank of Korea or commercial banks designated by KRX).

(4) Benefits of clearing & settlement through CCP

Minimizing counterparty settlement risk: CCP guarantees the settlement and reduces number of processes and settlement amount through netting.

59) The Fund is used to compensate losses incurred by covering settlement failure of members. Current size of the fund is 100 billion KRW which is contributed by Clearing Members on pro rata basis. Each members level of contribution is determined quarterly based on the members market share.

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Facilitating reliable transactions: CCP ensures anonymity of market participants and enables them to make prompt trading against reliable counterparty. Minimizing systemic risk: when Members settlement failure occurs, CCP prevents further settlement delays and failures of other members by immediately supplying the necessary liquidity in the market. Koreas Bankruptcy ACT also ensures CCPs priority on liability claims when KRX clearing member goes bankrupt. Enhancing Members credit: Members may take advantage of 0 counterparty risk in the Derivatives Market.

2. Clearing & Settlement Process

Confirmation of Transactions (722 KOSPI / 282 KOSDAQ) After the execution of a trade, KRX confirms the condition of transaction through its electronic trading system (Lockedin Trade). In this process, KRX separates KSFC financed transactions60) from other transactions and reflects changes made by correction of trading errors. Currently, KRX notifies the trading results to relevant parties (Members) in realtime basis. Assuming Settlement Liabilities (21 Membership Regulations / 73 KOSPI / 29
KOSDAQ)

Based on confirmed transactions, KRX assumes all clearing members settlement liabilities and, thus, all clearing members will only have the liabilities to KRX and not to other clearing members. Nonclearing members settlement shall be carried out by the designated clearing member who has entered into a Settlement Entrustment Agreement pursuant to KRX Membership Regulation (22). In this case, the clearing member and the nonclearing member will mutually assume each others rights and liabilities relevant to the settlement.

60) KSFC financed transactions refer to trades that are to be settled by financial loans provided to KRX by Korea Securities Finance Corporation (KSFC) in accordance with article 326 of the FSCMA.

 Netting and Determination of Settlement Payments/Deliveries (74 KOSPI / 30

KOSDAQ).

Amount of securities to be delivered for settlement is determined by netting (number of shares sold and number of shares purchased) per issue and per Clearing Member. Payment amount is determined by netting purchasing value and sales value per Clearing Member. It should be noted that settlement payment is determined by netting the concerned Members total sales value and total purchasing value of both KOSPI Market and KOSDAQ Market. Notification of Settlement Obligations (75 KOSPI / 31 KOSDAQ) KRX notifies the final settlement obligations (deliverable payments/positions and receivable payments/positions) to relevant Clearing Members and KSD. Fulfillment of Settlements (752 KOSPI / 312 KOSDAQ) Clearing Members shall make required payment for purchased securities and required delivery of sold securities to KRX by the settlement deadline (16:00) and, after the deadline, KRX makes payment of cash and delivery of purchased securities to clearing members (Delivery vs. Payment)61) who have receivable payments/positions. This settlement process is performed through bookentry transfer between KRX Settlement Accounts and Clearing Members settlement accounts. Securities Settlement Account (for transfer of securities) and Cash Settlement Account (for cash payments) are established by KSD on behalf of KRX. Although these Settlement Accounts are operated by KSD, KRX is the legal beneficiary to these Accounts and thus any transfer of securities and cash through these settlement accounts will have same legal validity as transferring them through KRX accounts. These settlement accounts are established for settlement purposes only.

61) As of Jul. 5th 2010, KRX will initiate early settlement (from 15:00) when members have completed its settlement prior to the current settlement deadline. This measure aims to facilitate early settlements between member firms and investors.

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 Settlement Instruction and BookEntry Transfer (756 KOSPI / 316 KOSDAQ) After the settlement deadline, KRX instructs KSD to make cash payments and delivery of securities from Settlement Accounts to relevant Clearing Members accounts. In this case, KRX (CCP) is the principal of settlement instruction and KSD becomes agent system operator. Thus, KSD is obliged to carry out the payment/delivery to Clearing Members account immediately upon KRX instructions. Monitoring of Settlement Status (755 KOSPI / 315 KOSDAQ) KRX monitors status of settlement process from 09:00 till the completion of the settlement by receiving necessary information62) from KSD through electronic network. This is to find any settlement risks in the market and to take appropriate actions if necessary.
Clearing & Settlement Procedures in KRX Markets

62) Information regarding Members settled/unsettled amount, time of payments/deliveries, and etc.

3. Risk Management
Monitoring of Settlement Risk (753 KOSPI / 313 KOSDAQ) KRX may request Clearing Members to provide status information (including reasons) on settlement amounts and settlement securities when there are possibilities of settlement failures. Supply of Liquidity to Guarantee Settlements (754 KOSPI / 314 KOSDAQ) When settlement failure (meaning Clearing Member fails to deposit required settlement amount or deliver required securities) occurs by the deadline, KRX immediately supplies the necessary liquidity in the market to allow all Clearing Members to receive anticipated settlement amount. Available financial resources for the supply of liquidity include Settlement Reserve63), Bank Credit Line, Joint Compensation Fund, Fiduciary Member Deposits, and any other financial resources that the Exchange deems necessary. Indemnification of Losses incurred by Settlement Delays (759 KOSPI / 319
KOSDAQ)

When a Clearing Member fails to fulfill its settlement obligations on time, KRX may impose indemnification claims against the Member for the losses incurred by such settlement delays. The loss shall be calculated by multiplying the loss ratio64) to the amount of unpaid settlement payments. Use of Settlement Delivery Bills (757 KOSPI / 317 KOSDAQ) When a Clearing Member is unable to deliver settlement securities by the deadline due to certain conditions, the Member may issue Settlement Delivery Bills through KSD as a substitution for its settlement obligations. Upon being notified from KSD of clearing members application for issuance

63) KRX reserves part of its cash account to use it as settlement liquidity in case of settlement failures. Currently, total settlement reserve is 100 billion KRW. 64) For settlement on Stocks, the loss ratio shall be 2/10,000.

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of Settlement Delivery Bill, KRX shall provide Guarantee of Securities Delivery (taking into account of the Clearing Members expected delivery date) and obtain a consent on accepting Securities Delivery Bill from the recipient Clearing Member. KRX shall notify KSD of such matters. Settlement Delivery Bill is issued by KSD on behalf of KRX and exchange of the Bill for settlement between KSD and concerned Clearing Member shall have same legal validity as exchanging the Bill between KRX and concerned Clearing Member. Exceptions in Securities Settlement (758 KOSPI / 318 KOSDAQ) When it is deemed that settlement can not be carried out due to difficult market conditions, KRX may conduct settlement with cash or other securities issues based on consent from the recipient Clearing Member.

4. Handling of Settlement Failures

Actions to be taken in case of Settlement Failures (76 KOSPI / 32 KOSDAQ) In case when a Clearing Member fails to fulfill its settlement obligation or when there is recognized possibility of such nonfulfillment, KRX may take following actions for certain period (or until the cause of such settlement failure has been resolved); i. suspend the Clearing Member from trading in the market (whole or in part); ii suspend the delivery of securities or the payments to concerned Member; or iii. not assume settlement liabilities from that particular Clearing Member; and etc. Recognized possibility of nonfulfillment, in above paragraph, shall refer to following cases; i. when the Member files for suspension of payment or corporate workout plan;

ii. when Promissory Notes or Credit Checks issued by the Member are dishonored (bankrupted); iii. when the Members banking transaction has been suspended or halted; iv. when the Members business has been suspended by FSC; v. in case of a foreign branch office located in Korea, when the Members overseas headoffice comes under or comes close to any abovementioned cases; vi. when there is largescaled financial accident, sudden contraction of market liquidity, or excessive use of Settlement Delivery Bill; and etc. Clearing with Receivable Cash & Securities (76 KOSPI / 32 KOSDAQ) In case where a Clearing Member is suspended from receiving settlement cash or securities from KRX, such lockedin cash or securities shall be used to recover liability claims from that Member or to setoff against payable amount to that Member. Also, KRX may sell those lockedin securities to cashin or to buyin securities for settlement purposes. Recovery of Losses incurred by Settlement Failures (25 of Membership
Regulation)

KRX shall recover losses incurred from Members settlement failures by using concerned Members fiduciary membership deposits, margin deposits, receivable settlement cash or securities, and part of Joint Compensation Fund contributed by the Member. When all losses can not be covered by the concerned Members assets, KRX will use Joint Compensation Fund contributed by other Members. In this case, other Members contributions to cover the loss shall be distributed on pro rata65) basis. When all losses can not be covered by the Joint Compensation Fund, KRX shall use its own assets such as the Settlement Reserve.

65) Based on proportion of Members contribution to the Joint Compensation Fund.

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 Indemnification of Losses incurred by Settlement Failures (399, 400 of the

FSCMA)

KRX shall compensate the losses incurred from any Members settlement failures. In turn, KRX shall be entitled to the right of indemnification against the member who has caused the settlement failures for compensated amount and all expenses incurred thereof. KRX and other Members have indemnification priority over other creditors on assets of the Member who has incurred the losses. Report to FSC (363 of the FSCMA) When KRX compensates the losses incurred from the Members settlement failures, KRX shall notify FSC of such matters. Dispatch of KRX Employees (76 KOSPI / 32 KOSDAQ) If deemed necessary, KRX may assist the Members settlement process by dispatching its employee to the premise of concerned clearing member. Lifting of Suspensions on Settlement Failures (762 KOSPI / 322 KOSDAQ) In case where KRX has not decided on the terms of settlement suspension against the Member, the Member may request to lift the suspension when the causes of such settlement failure have been resolved.

Introduction to Trading in KRX Stock Markets Published by KRX in May 2010

Disclaimer: This English version of publication on Introduction to Trading in KRX Stock Markets shall be used for reference purposes only. This is not an official guideline to original Korean version of rules and regulations as well as laws which are relevant to trading in KRX markets. Certain parts of the descriptions on relevant rules, regulation, and laws in this document may have been edited to accommodate differences in writing style and expression between English and Korean. In cases where any differences occur between this English explanation and the original (Korean) rules, regulation, and laws, the original rules, regulation, and laws shall prevail. Korea Exchange shall accept no responsibility or liability for damage or loss caused by any error, inaccuracy, or misunderstanding with regard to this material.

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