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(News Focus) S. Korea's FX revamp measures expected to reduce volatility, raise hopes for MSCI inclusion

Finance 14:18 February 07, 2023

By Koh Byung-joon

SEOUL, Feb. 7 (Yonhap) -- South Korea's latest measures to revamp the foreign exchange (FX) market are expected to help expand trading and reduce the overall level of volatility, experts said Tuesday.

Those measures are also expected to raise hopes for South Korea's stock market to be included in the developed market status of Morgan Stanley Capital International (MSCI) that could lead to a rise in capital flows into the country's stock market going forward, they added.

Earlier in the day, the finance ministry and the central Bank of Korea (BOK) said that they are seeking to open the foreign exchange market from 9 a.m. to 2 a.m. the following morning on weekdays, an extension from the current 9 a.m.-3:30 p.m. operating time.

The extended trading hours will be implemented as early as the second half of 2024 with a longer-term aim to open it around the clock as do other major countries.

Under the plans, they also aim to allow foreign financial institutions approved by the government to directly participate in the forex market here that has been available only to local banks and financial entities.

"Foreign exchange is the way capital moves in and out of a country," Kim Seong-wook, the deputy minister for international affairs, said during a conference Wednesday on the latest steps. "We aim to expand and repair the old, two-lane unpaved road to outside the country into a smooth, four-lane paved road.

"The current old road can no longer live up to transportation demand that has been sharply expanding, and its narrow width poses a threat to stability," he added. "Most of all, due to the uncomfortable road conditions, access from outside is restricted, hindering the development of the domestic market and industry."

(News Focus) S. Korea's FX revamp measures expected to reduce volatility, raise hopes for MSCI inclusion - 1

The country's relatively "restrictive" access to the forex market has been cited as a major factor that hurts stability and hinders the development of the capital and financial markets as its growth has failed to catch up with an increase in trading and stock transactions.

According to government data, the combined amount of the country's exports and imports grew from US$280.8 billion in 1997 to $1.42 trillion in 2022 and the daily average stock trading volume also expanded from $600 million to $12.45 billion over the same period.

The daily average of trading on the spot forex market, however, grew at a much slower pace from $1.83 billion to $9.4 billion, the data showed.

Heightened volatility and excessive one-sided moves in the dollar-won exchange rates have frequently stoked worries over instability in the financial market and the broader economy as evinced by the 1997-98 financial crisis.

Another problem is that most overnight FX trading currently takes place in the offshore non-deliverable forward market that can sometimes emerge as a conduit for speculative investment, causing the spot market here in the following morning to go through sharp fluctuations.

Tuesday's measures marked the latest in a series of plans unveiled by the Seoul government and financial authorities aimed at raising market practices to global standards and removing the "Korea discount" that refers to the relatively low valuation of Korean stocks due to such factors as weak corporate governance and complex regulations.

The Financial Services Commission, the country's top financial regulator, recently said it will seek to remove a decades-old system that requires foreigners to register their identities before investing in local stock, obligate listed firms to provide regulatory filings in English "in phases" and offer more information on dividend payouts.

The Korea Exchange, the operator of the stock market, also said it will push to open the derivative market earlier and allow for nighttime trading in the area.

Those measures appear aimed at raising the possibility of South Korea to be included in the MSCI's developed market status that could increase capital flows into the stock market here.

Last June, the MSCI reclassified South Korea's stock market as an emerging market, saying it needs to make more efforts to increase foreign investors' market access, including FX trading.

Experts say that capital flows into the financial market could expand if the government's latest measures help the country gain the MSCI's developed market status, though it appears to be a far-off event and based on assumptions.

"Whether those measures will lead to a greater influx of foreign money remains to be seen," Park Sang-hyun, an economist at Hi Investment & Securities, said. "But if they lead to the MSCI's inclusion, it will attract more foreign capital."

Concerns are still lingering that the planned operating hour extension for the forex market could increase volatility as large amounts of foreign capital could sway the direction of the market when the trading volume remains relatively low and set the tone for daytime trading.

The BOK vowed to work hard to minimize any side effects.

"Not all foreign institutions will be allowed to participate in the market. Only those with characters similar to local players' will do," a BOK official said. "Participants with speculative natures, such as hedge funds, cannot participate directly."


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