South Korea hopes currency reforms will move chunk of NDF trading to spot deliverables

SEJONG :South Korea hopes its push to reform currency trading will drive a large share of trading volumes from the non-deliverable forwards market to its spot currency market, a senior government official said on Tuesday.

The remarks made in an interview reflect the latest official thinking after historic market reforms kicked off this year to court foreign investors and get on global indexes, with steps such as longer trading hours and wider foreign participation.

“There is hedging demand but also those who just want to buy the won, they are forced to go to the NDF market,” Shin Joong-beom, director general of the finance ministry’s International Finance Bureau, told Reuters, referring to forex transactions.

“We hope to move a big chunk of the NDF (to the spot deliverable market).”

Foreign investors rely on the derivatives market known as the non-deliverable forwards to trade the won and manage their exposure to the currency offshore.

The onshore market now trades from 9 a.m. to 3:30 p.m. But from July, South Korea will extend trading hours to run from 9 a.m. to 2 a.m., covering London business hours.

The move will allow a broader range of global investors to participate in the interbank FX market.

Starting this year, the government also began allowing some foreign financial institutions to participate directly in the local interbank currency market.

About 20 foreign firms have applied to participate in South Korea’s local interbank, said Shin, among them SSBT London, SSBT Hong Kong, HSBC Singapore, CA Paris, MUFG Tokyo and SC London.

“Being able to provide the dollar/won spot exchange rate during the London fixing time is one of the very important factors for global fund investors who follow MSCI or WGBI,” Shin said, as the value of global funds is assessed daily.

The reforms will positively affect South Korea’s efforts to get its stocks and bonds accepted into benchmark developed market indexes, Shin added, which could draw inflows of billions of dollars into Asia’s fourth largest economy.

South Korea has a long-standing bid to join the FTSE World Government Bond Index, and the league of developed market countries at MSCI.

Shin’s team was in talks with securities settlement house Euroclear, aiming to boost foreign investors’ access to the won currency, he added.

The Brussels-based settlement house, which completes transactions in stocks and bonds across Europe, said in August last year it would open an omnibus account for South Korean treasury bonds.

“We’re of course in talks with them to address any inconveniences faced by foreign investors,” Shin said. “If there are, we would positively review to address them.”