On February 7, 2023, the Ministry of Economy and Finance (“MOEF”) and the Bank of Korea (“BOK”) announced the FX Market Structural Improvement Plan (the “Plan”). The Plan seeks to align the Korean FX market to global standards and thereby improve market accessibility by foreigners. The Korean FX Market has been considered difficult to access by foreigners due to various structural impediments which has been viewed to hinder KRW exchange rate stability and the development of the capital market and the financial industry in Korea.
Below are key details of the Plan.
1. Introduction of the Registered Foreign Institution (“RFI”) system
Currently, participation in the Korean interbank FX market (“Interbank Market”) is limited to banks and a limited number of Korean non-bank financial institutions registered as foreign exchange businesses (“Onshore FX Businesses”). Accordingly, offshore financial institutions are able to effect FX transactions only through Onshore FX Businesses. Under the Plan, offshore financial institutions (including overseas subsidiaries/branches of domestic financial institutions) will be able to participate directly in the Interbank Market as an RFI upon registration. RFI’s will be able to engage in spot FX and FX swap transactions with all onshore Korean and offshore counterparties as is currently done by Onshore FX Businesses. However, RFI’s must settle their deliverable KRW FX transactions through a KRW account opened with a Korean bank and trade through a licensed Korean FX broker. The qualification requirements to register as an RFI along with the reporting requirements for trades executed on the Interbank Market will be announced once the details are finalized.
2. Extension of FX market trading window to 2:00 a.m. KST
The Interbank Market closing time will be extended until 2 a.m. KST from the current closing time of 3:30 p.m. KST. Foreign investors investing in KRW-denominated assets are known to pay higher fees for KRW conversions executed after the 3:30 pm closure of the Interbank Market. Furthermore, as there are no published KRW exchange rates for FX conversions effected after the Interbank Market trading hours, valuation of KRW denominated assets held by foreign investors is known to be cumbersome. The extension of the Interbank Market trading window to 2 a.m. KST, which matches the closing time of the London FX market, will allow FX transactions to take place after the closure of the Korean securities market. In addition, the extension of the Interbank Market trading window will allow publication of benchmark exchange rates referencing those transactions executed after 3:30 p.m. KST.
3. Introduction of e-brokerage of FX transactions for brokerage of customer transactions
Currently the Foreign Exchange Transactions Act (the “FETA”) only permits the brokerage of FX transactions between financial institutions. According to the Plan, pre-registered aggregators will be permitted to intermediate FX transactions for non-financial institutions using electronic platforms. Electronic intermediation can be done through chats, RFQs (request for quotation), and disclosed streaming, but the so-called “non-disclosed streaming” method, which allows automatic execution of FX transaction at the best price without specifying the counterparty in advance, will not be permitted.
4. Non-residents to be permitted to engage in foreign exchange transactions with third party banks
It is practice for non-residents, including offshore financial institutions, to effect KRW conversions only through designated accounts established with their Korean custodian bank for the purpose of investing in KRW denominated assets. However, the MOEF has clarified that non-residents can execute KRW FX transactions through third party banks (i.e., banks other than a custodian bank) even under the current regulations. The MOEF is expected to issue an interpretive ruling on this point soon to provide clarity to the market. Accordingly, FX transactions with third party banks will become feasible allowing foreign investors investing in KRW denominated assets to effect KRW conversions at a more competitive rate.
As most of the above measures require amendment of relevant laws such as the FETA, implementation will take some time. According to the MOEF, the target go-live date for the changes is the second half of 2024, following a six-month test run after review of market demand. However, as non-residents effecting FX transactions with third party banks would not require any legislative amendment, the implementation date is expected to be indicated by the MOEF in their interpretive ruling.
