Longer won trading hours with eye on inflows
Seoul signals more openness to foreign funds
Seoul: South Korea will kick off a test run to extend the trading hours of its currency today to improve the market’s accessibility and ultimately attract more inflows.
The initiative is a step toward enabling investors to trade the won around the clock, and may eventually boost the case for the nation’s stocks and bonds to be added to global indexes.
By lengthening the hours, Seoul is also signalling an increased openness to the capital flows and volatility that it had tried to shield its economy from in the aftermath of the Asian Financial Crisis.
As of this year, foreign entities which meet the conditions set by authorities are allowed to trade the won and forex swaps onshore directly using the local interbank system. State Street Bank and Trust in Hong Kong was the first overseas lender to take part in the local interbank market on Jan 2.
The won can only be swapped directly with the US dollar and the yuan – and in the instance of the latter, the exchange is permitted to take place either in Seoul or Shanghai. Trading in the onshore currency market runs from 9am to 3.30pm local time.
When onshore markets are closed, foreign investors have to rely on derivatives contracts known as non-deliverable forwards to manage their exposure to the won offshore. Foreign firms that don’t fulfil the government’s requirements have to set up a branch in South Korea or pay a commission to local banks to trade on their behalf.
Come July, trading hours for the onshore won and forex swap markets will be extended to 2am, following the test run that starts this week.
Most South Korean banks plan to start or have already installed night shifts to accommodate the new hours, while some larger players are looking to relocate their staff to London and New York.
Under the new framework, offshore trading of the won will remain off limits and the currency can still only be directly exchanged with the US dollar and yuan.
Rules will remain in place for foreign players that wish to participate in the local interbank market: an applicant must sign credit line contracts with at least 10 South Korean financial institutions including at least four so-called “forex leading banks” or banks designated to help bolster trading of the won in return for certain incentives.
In addition, foreign players with access to the local interbank market must still trade through authorised brokers, while hedge funds aren’t eligible to apply for registration.
South Korean authorities intend to maintain a firm grip on the nation’s financial markets to avoid a repeat of the capital flight that decimated the economy during previous bouts of volatility.
The Kospi share index and the won lost half their value during the Asian Financial Crisis in 1997 and came under renewed selling pressure during the Global Financial Crisis in 2008. As the won slumped, scores of firms that relied heavily on foreign borrowings were unable to repay their debt and collapsed as a result.
Authorities have since grown wary of the extreme price swings that can arise from global capital outflows, and have accumulated a Us$420bil foreign reserve stockpile – one of the world’s largest – to beef up their defence.
An increase in the won’s trading hours will improve the forex market’s accessibility and address a key gripe of index providers which have held back from including South Korean bond and stocks in their gauges.
FTSE Russell refrained from adding South Korea to its global bond index in September, saying it would monitor the impact of the nation’s forex reforms.
An inclusion is expected to usher in billions of US dollars of inflows and some investors expect the nation’s securities to be added to the FTSE World Government Bond Index as early as March.