S.Korea to allow offshore investors to directly trade won

South Korea is set to allow offshore investors to directly trade the won and extend the operating hours of the local currency market from July next year in a move to increase foreign investments.

The Ministry of Economy and Finance and the Bank of Korea on Tuesday unveiled details of long-touted reform measures of the country’s foreign exchange market to boost the attractiveness of won-denominated assets by increasing access to the South Korean unit while stabilizing the currency market by ramping up its size.

“South Korea became a developed economy but the foreign exchange market remained closed and restricted due to the 1997 financial crisis,” said Assistant Vice Finance Minister Kim Seong-wook. “The growth in the currency market and participants are expected to bolster the attractiveness of assets in the won and contribute to the stabilization in the foreign exchange rate.”

The move came as MSCI Inc., which has been classifying South Korea’s stock market as an emerging market for years, said the country needs to improve its foreign exchange market to earn developed market status.

DIRECT CURRENCY TRANSACTIONS

The country plans to permit registered foreign institutions (RFIs) located in other countries that meet certain requirements and obtain approval from the foreign exchange authorities, to directly participate in the domestic interbank market, in which 54 local banks, foreign lenders’ branches in South Korea and securities firms trade the won at present.

With the RFI status, foreign investors will be able to trade the local unit through electronic trading systems anywhere in the world. The authorities plan to allow RFIs to trade not only the currency spot but also foreign exchange swaps in the domestic market.

Offshore investors currently need to open branches in the country or go through local financial institutions for foreign exchange deals in the local currency market.

The authorities played down concerns that such moves will create a playground for foreign capital with enormous money and developed financial techniques.

“Investors such as hedge funds with speculative nature will be excluded from the RFI approval,” said a senior BOK official. “The authorities will apply the same supervisory system such as deal monitoring and market management as before.”

FOR EVENTUAL 24-HOUR TRADING

The country decided to extend the operating hours of the onshore won market, which opens at 9 am local time, by changing the closing hour to 2 am the following day from the current 3:30 pm to cover the trading hours of US and European markets.

The authorities are set to gradually increase the operating hours of the domestic currency market further, eventually to 24 hours.

That will help foreign investors in other countries trade the won anytime, they added.

Write to Jung-hwan Hwang and Eui-Jin Jeong at jung@hankyung.com
Jongwoo Cheon edited this article.