Forex market changes open new opportunities for banks

[Graphics by Song Ji-yoon]

As South Korea‘s foreign exchange market is set to undergo major changes, including extended trading hours and the entry of foreign institutions, Korean commercial banks are stepping up efforts to capitalize on the emerging business prospects.

According to financial industry sources on Wednesday, the country’s four major banks - KB Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank - are operating task forces to recruit specialized staff and explore new business opportunities in preparation for the forex market overhaul.

The main changes include two measures: first, the Seoul foreign exchange market will extend its trading hours starting in July 2024 from the current 3:30 p.m. to 2:00 a.m., in line with the closing time of the London market, and plans to gradually move into a 24-hour system. Second, registered foreign institutions (RFIs) approved by the South Korean authorities will be allowed to participate directly in the Seoul foreign exchange market. Foreign institutions were previously not allowed to do so and had to rely on the non-deliverable forward (NDF) market.

Commercial banks are seeking to register their overseas branches or subsidiaries as RFIs to participate in the Seoul FX market. As of Wednesday, there are 22 RFIs, including KB Kookmin and Hana Banks’ branches in London and Singapore, as well as the overseas branches of foreign banks such as Deutsche Bank, Bank of America and ING Bank. “As an RFI, we plan to gain overseas customers with proactive marketing in global financial centers such as London and Singapore,” an official at KB Kookmin Bank said.

Shinhan Bank has applied for its branches in Vietnam and India to become RFIs due to their strength in sales. Woori Bank seconded traders to its London branch in May 2024 and is mulling registering its branches in Vietnam and Indonesia as RFIs. There is also high interest in the foreign exchange transaction agency business for RFIs. Korean banks can earn fee income by handling foreign exchange transaction reporting, account management, and other services on behalf of RFIs. KB Kookmin Bank and Hana Bank are reportedly preparing to offer these services and are in contact with RFIs.

Third-party foreign exchange transactions have also emerged as a new opportunity. Previously, foreign investors could only conduct foreign exchange transactions such as selling dollars and buying won via banks where they had accounts. But with the approval of third-party FX transactions, foreign investors are now free to choose their banks. KB Kookmin Bank is forming a dedicated sales team to pioneer this market.

Competition for electronic foreign exchange trading platforms for corporate customers is also heating up. Hana Bank, the market leader in this sector, introduced its own Hana FX Trading System for both Korean and foreign financial institutions that provides 24-hour real-time exchange rate information and generates new revenue. For example, Toss Bank, an Internet-only bank, adopted Hana Bank’s foreign exchange trading system in 2024 to provide various foreign exchange services. Hana Bank aims to attract foreign stock trading platforms entering Korea, as well as foreign financial institutions interested in investing in won-denominated assets. “We plan to secure a wide range of overseas customers and expect related business profits to more than double from the previous year,” the bank said.

KB Kookmin Bank and Shinhan Bank also launched electronic forex trading platforms in 2023, while Woori Bank launched its platform targeting mid-sized companies earlier in 2024.

Banks see the new foreign exchange-related businesses as an opportunity to increase non-interest income after being criticized for neglecting the expansion of non-interest income. They currently maintain an 80:20 ratio between interest and non-interest income.

The changes are also expected to have a positive impact on the Korean foreign exchange market’s stability. “As the sources of foreign exchange supply diversify and trading volumes increase, exchange rate volatility will likely decrease,” a senior bank official said.