South Korea is extending won trading hours in a move to make the currency more tradable and attract new international players. Here, we look at how international institutions can access the market, and how it can benefit the won.
Extended trading hours
At present, won trading hours run from 09:00 to 15:30 South Korean time. From July 2024, this will change to 09:00 to 02:00 the following day. This means won trading will extend to 17:00 Greenwich Mean Time in London, and 12:00 Eastern Standard Time in New York.
The extended hours and increased accessibility into the bond markets is hoped to capitalise on South Korea’s strong position. The county’s external assets amounted to 46.3 per cent of gross domestic product as at the end of 2022. Based on this, public foreign investors such as central banks and sovereign wealth funds are increasing their investments in won-denominated assets.
In order to drum up interest, roadshows were held to attract foreign financial institutions and investors, with inventors interested in the prospect of reduced costs on dollar/won spot and foreign exchange swap transactions, and improved convenience.
Before the implementation of the new structures in July 2024, a pilot phase has been introduced, with financial institutions in Singapore, Hong Kong, London and New York completing their required registered financial institution registration, and some already beginning to trade. Previously, only domestic banks and overseas bank branches within South Korea were able to trade.
Why was this step taken?
There are a couple of reasons why this appealed to the regulator. The change to the stock market structure comes as part of a push to see the South Korean stock market be recognised as ‘developed’ status by index provider MSCI. To date, MSCI has cited the need for FX market reform as essential for the market to progress beyond its current ‘emerging market’ rating.
The step also brings the won closer in line to most fully externally convertible currencies that are traded 24 hours a day, such as the US dollar, the euro and the yen. But to achieve this, the won must also undergo several measures beyond simple extended trading hours.
KC Lam, global head of FX and rates at the Singapore Exchange Group, says the move brings the won in line with border industry trends: “China had similarly extended onshore yuan trading hours previously in its effort to internationalise the yuan. Such extensions of onshore trading hours could be helpful for investors and traders who may need to trade both [over the counter] and listed FX futures. International investors would always welcome government initiatives that improve accessibility and liquidity of currency markets.”
What it means for South Korean banks
The decision to extend trading hours has seen banks establish night shifts for their workers. Shinhan Bank began a rota for night working in September 2023. The other major banks, including Woori Bank, Korea Development Bank and Industrial Bank of Korea, are all following suit. There are also demands to improve IT systems, and promote electronic trading through the development or upgrade of the single bank platform.
Shinyoung Kim, head of the foreign exchange market team at Bank of Korea, says there are some plans for South Korean banks to register their overseas branches as registered financial institutions to allow them to complete FX transactions.
Appetite for the won
The South Korean banking system introduced measures to improve the FX market structure and to improve capital market regulations in early 2023. Foreign investors are allowed to exchange currency without opening an additional account, and electronic trading infrastructure, such as the activation of a single bank trading platform. The foreign investor registration obligation will be abolished, and a Euroclear KTB (Korean Treasury Bond) integrated account system will be introduced.
Kim says that once the measures are implemented, it will increase dollar/won trading volume, investment in won-denominated assets, and market participants trading in the dollar/won FX market. “As a result, it is expected that liquidity of the onshore FX market deepens, and price discovery function and external shock absorption capacity is improved,” says Kim.
Meanwhile, Lam says there has been an increase in activity for the won: “In the past year, the short-term interest rate gaps between the US dollar and South Korean won, coupled with varying sentiments on South Korea’s economic outlook, has led to increased currency hedging including during our T+1 session in the US and European hours.
“This is reflected in the increase in volumes and liquidity of our SGX KRW/USD futures whose notional average daily volume reached a record $230mn in December 2023, up more than 126 per cent year on year, while month-end open interest stood at $506mn.”
Open interest is the total amount of open contracts, such as futures, which have not been settled. It can be seen as a measure of market activity, with open interest presenting new opportunities for new money and market participants to enter. Increasing levels of open interest represents more money coming into a market. This will, in turn, attract more investors to consider the market.
How it will impact trades
The move was also made due to the competitiveness of delivery transactions over non-deliverable forwards. NDFs are a short-term currency forward between two parties. On the agreed settlement date, the profit or loss is changed related to the contracted NDF rate and the spot FX rates on the amount.
Kim says the Bank of Korea expects that some NDF transactions linked to the hedging of won-denominated assets will be absorbed into delivery transactions. “The degree of absorption will depend on price competitiveness and liquidity compared to NDFs that are already actively traded. In the mid to long term, we expect that a virtuous cycle of decreasing NDF liquidity and increasing delivery liquidity will be formed,” he adds.