S.Korea to implement FX reforms to make it more accessible to investors

Hana Bank dealing room [Photo by Lee Chung-woo]

The South Korean financial authority will implement regulatory reforms in the local foreign exchange market as early as July to attract more investments from offshore by allowing longer operating hours and overseas financial institutions to trade locally.

“South Korea’s FX market has been closed and restrictive for decades in the aftermath of the previous financial crisis,” said Kim Seong-wook, a senior official from the Ministry of Economy and Finance, on Tuesday. “Yet, the current structure needs to be reformed.”

The Korean currency market has remained closed for decades because market stability became a priority in its financial policy since the 1998 financial crisis. As a result, the Korean won is not an asset that local investors can trade in offshore markets, unlike other currencies such as the U.S. dollar and euro. Also, offshore banks and securities firms are not allowed to trade the won locally. The current market runs from 9 a.m. to 3.30 p.m.

However, Yoon’s government points that such limited access has hampered market stability and hindered any improvement in the local capital market and financial industry. According to the government, that has resulted in the proliferation of the non-deliverable forward (NDF) market, in which speculative transactions are gaining momentum. A survey from the Bank for International Settlements found that Korea’s won-dollar NDF transactions last year reached a daily average of $49.8 billion, ranking the country first worldwide. On the other hand, Korea’s average turnover of spot transactions on a daily basis was placed 16th, amounting to $35.1 billion.

The upcoming reforms on the FX market include extending the operating hours to 2 a.m. when the U.K., the heart of the world’s financial market, closes its business. The government added that operating hours would likely be extended further to 24 hours.

Extended operating hours could solve the difficulties of offshore investment by enabling investors to exchange Korean won for other currencies immediately at a real-time rate. In the current market, investors have no choice but to exchange won first at a temporary rate, higher than the actual rate, when the market is closed. Then they get the difference back on the following trading day. That has forced some investors to buy stocks less than they intended.

Under the reforms, an FX broker platform, “Aggregator,” will be implemented as part of the government’s efforts to beef up the FX market status. The one-stop transaction tool allows investors to compare the exchange rates by multiple banks, choose the most favorable one, and make a transaction based on that rate. Bloomberg and Reuters have established their affiliate to adopt the platform in their services.

The government said the reforms would make Korean won-denominated assets more attractive to foreign investors and ensure more offshore capital investments.