[Foreign Exchange Structure Reform] Foreign Exchange Market Open Until 2 AM... Offshore Won Transactions Also Allowed

Remove Participant and Time Restrictions in the Foreign Exchange Market

The government announced a 'structural improvement' plan to open the domestic foreign exchange market to the level of advanced countries. The key points include allowing foreign financial institutions to directly participate in the domestic foreign exchange market and extending the market operating hours, which currently end at 3:30 PM, to 2 AM. Compared to the current operation of only 6 hours and 30 minutes a day centered on domestic banks, this is an innovative reform. The government plans to fully open the doors of the Korean foreign exchange market, which has been operated closedly for the past 20 years due to trauma from the 1997 foreign exchange crisis, and link it to the development of domestic capital, financial, and industrial markets.

On the 7th, the Ministry of Economy and Finance and the Bank of Korea announced the "Foreign Exchange Market Structural Improvement Plan" at the Seoul Foreign Exchange Market Operation Council seminar held at the Bankers' Hall in Myeongdong, Seoul. This concretizes the foreign exchange market system reform plan announced by the government in June last year as part of the new government's economic policy direction. Previously, the government judged that despite Korea having trade volume and capital markets at the level of advanced countries, the domestic foreign exchange market was operated closedly, lowering exchange rate stability and reducing the attractiveness of won-denominated assets to foreign investors, causing significant side effects, and thus pushed for reform.

Opening the Foreign Exchange Market... Operating Until 2 AM

First, the foreign exchange authorities will allow foreign financial institutions (RFIs) located overseas and approved by the government to directly participate in the domestic foreign exchange market. Currently, only domestic banks and foreign exchange business handling institutions and foreign bank branches (foreign bank branches) can participate, but this will be greatly expanded to global financial institutions. To enable RFIs to operate as market participants, not only the spot foreign exchange market but also the foreign exchange swap (FX swap) market will be opened. However, hedge funds and foreign exchange specialized investment companies will not be allowed, and the opening of other foreign exchange derivatives such as currency swaps (CRS) and currency options will be decided later. RFIs allowed to participate in the market must conduct transactions only through domestic foreign exchange brokerage firms to remain under the authorities' monitoring and supervision.

Also, to avoid inconvenience in overseas transactions, the domestic foreign exchange market's opening hours will be extended to 2 AM, the closing time of the London financial market. The government plans to expand this to 24-hour opening in the future, considering the preparation status of banks and market conditions. With the allowance of foreign institutions' participation in the domestic market and the extension of operating hours, global investors' participation in the domestic market is expected to increase significantly. Currently, the domestic stock and foreign exchange markets close simultaneously, causing great inconvenience for overseas investors to exchange currency after the stock market closes, but this problem can be alleviated in the future. A Bank of Korea official explained, "We initially considered extending only until 5-7 PM, but decided on 2 AM to align with the purpose of structural improvement."

The foreign exchange authorities also plan to build market infrastructure suitable for the level of advanced countries. The introduction of the 'customer-facing foreign exchange electronic brokerage service (Aggregator),' which is already common in global markets, is a representative example. A Ministry of Economy and Finance official said, "It is a service conducted through terminals," and explained, "For example, currently, if a company wants to sell dollars because the exchange rate has risen, it has to ask the bank it deals with, but in the future, it will be able to check prices from multiple banks simultaneously and trade through an electronic terminal." A Bank of Korea official said, "The purpose is to allow RFIs to operate in the same electronic trading environment as domestic financial institutions." In addition, considering that RFIs find it difficult to use the existing foreign exchange computer network that requires a dedicated network, the authorities will also prepare a separate reporting system.

Currency Exchange Without Time Restrictions... Implementation in July Next Year

Once the foreign exchange market is fully opened, overseas investors will be able to exchange won without time restrictions. Until now, foreign investors who wanted to buy Korean stocks had to wait until 9 AM (7 PM US time), when the Korean foreign exchange market opens, to exchange won. Although they could trade non-deliverable forwards (NDFs) in the offshore foreign exchange market to fix the won exchange rate in advance, this still required additional spot foreign exchange transactions after the domestic foreign exchange market opened, causing inconvenience. However, in the future, not only will it be possible to exchange won at any desired time, but transactions can also be made with global banks as well as Korean financial institutions, making domestic stock investment much easier.

Domestic individual investors will also be able to exchange currency at market rates even at night. Currently, when investing in overseas stocks at night, the domestic foreign exchange market is closed, so investors have to exchange currency at a high rate first and then settle it again after the foreign exchange market opens the next morning, causing inconvenience. However, in the future, it will be possible to exchange currency at market rates anytime, allowing investors to purchase US stocks in the exact quantity originally planned. Also, domestic financial institutions, which have mainly operated targeting domestic customers, will now have broader contact points with foreign customers, creating new business opportunities both domestically and internationally.

The foreign exchange authorities plan to implement these structural improvement measures in earnest in the second half of next year after a six-month pilot operation. First, to revise legal regulations, the Foreign Exchange Transaction Act amendment bill will be submitted to the National Assembly in the third quarter of this year, and a 'Foreign Exchange Market Structural Improvement Promotion Task Force' involving the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service will be formed to support the preparation status of domestic financial institutions. Kim Seong-wook, Director General of International Economic Affairs at the Ministry of Economy and Finance, emphasized, "If domestic finance is the road through which money moves inside the country, the foreign exchange market is the road through which money travels inside and outside the country. For decades, we have maintained an old and narrow road, that is, a closed and limited foreign exchange market, but now it is time to change."