Korea’s financial watchdog unveiled on Friday a set of new initiatives that include the establishment of a third stock market for small companies in 2012, heralding a new phase for the country’s direct funding mechanism.

In its 2012 policy report, the Financial Services Commission said the envisioned stock market will be dedicated to small and medium enterprises so that they can secure fresh funds for new investments.

Korea runs two stock markets. The main bourse, KOSPI, is made up of blue-chip companies such as Samsung Electronics and Hyundai Motor, while the junior bourse, KOSDAQ, is packed with technology-led firms. A third market, if set up as planned after the related law gets revised, would serve companies that are not listed on the KOSDAQ yet.

The FSC said the listing requirements on the third stock market would be far less stringent than those of KOSDAQ so that SMEs could benefit from direct financing from investors.

But considering the higher risks, the FSC said the third stock market would revolve around institutional investors, not individual investors.

The financial watchdog said measures to ease requirements for listing on the KOSDAQ will also be introduced to help more SMEs with promising technologies and growth potential to go public.

Another noticeable policy plan in the report centers upon the stabilization of the market. In 2011, the Korean stock market was battered by greater external uncertainties such as the eurozone debt crisis and double-dip concerns for the U.S. economy.

To curb volatility, the FSC said it will loosen up the regulations that govern the stock investment of pension funds.

Pension funds are currently required to follow strict rules when they purchase stocks as the investment capital they handle should be managed conservatively in consideration of the funds’ focus on stable investment profits in the long term.

The FSC views that it’s time for the government to lift some of the restrictions so that pension funds can increase their stock investment, which will help stabilize the Korean financial market.

The plan is a response to the repeated calls of investors that the government should take steps to strengthen the Korean market that tends to fluctuate wildly when foreign investors unload local shares on developments happening overseas.

The stock ownership of foreign investors in Korea is around 30 percent, a high portion that is often cited as a reason for high volatility here.

The greater role of local pension funds would help shield the stock market from unnecessary shocks linked to foreign investors and external factors, the FSC said.

The FSC also said it aims to slow the growth pace of household debt in 2012. The country’s household credit reached 892.5 trillion won ($773.7 billion) as of the end of September, generating concerns about its negative impact on domestic spending.

“If necessary, the FSC plans to come up with additional steps to curb household debt,” the financial watchdog said.

By Yang Sung-jin (insight@heraldcorp.com)