The Guidelines on Foreign Exchange Business of Foreign Financial Institutions (the “Guidelines”) took effect on October 18, 2023. Pursuant to the Guidelines, foreign financial institutions, including those institutions without a presence in Korea, will be able to participate in the onshore interbank foreign exchange (“FX”) market in Korea and to enter into KRW/USD FX trades with non-residents. The partial amendments to the Enforcement Decree of the Foreign Exchange Transactions Act of Korea came into effect on September 25, 2023 providing the basis for qualified foreign financial institutions to register themselves as “Registered Financial Institutions” (“RFI”) so as to participate in the onshore interbank FX market. The Guidelines set forth detailed requirements to register as RFIs, including eligibility requirements, registration process and the permitted scope of businesses that can be engaged in by an RFI.
Key details of the Guidelines pertaining to RFIs are summarized below.
Eligibility Requirements and Registration Process for RFIs
Once the Guidelines become effective, foreign banks and securities companies which are recognized as meeting internationally accepted standards for financial soundness, such as Basel III, may apply for registration as RFIs by submitting a completed application form together with other required documents.
Foreign financial institution applicants are also required, among others, to enter into credit extension agreements with at least ten government-approved Korean financial institutions, four of which should be FX leading banks designated by the Ministry of Economy and Finance (the “MOEF”) and to open KRW/USD accounts for settlement of trades. However, as the requirement to have in place credit extension agreements will become effective from January 1, 2024, the RFI registration application may be submitted prior to January 2024 on the condition that the execution of credit extension agreements will be completed within a certain period of time.
Upon the review of the registration application and other documents by the MOEF, if it is determined that the applicant meets all the requirements, the registration as an RFI will be approved. Given that the RFI regime is new, the MOEF may request for additional information or documents after the submission of the registration application and prior consultation with the MOEF may be necessary.
Permitted Scope of Businesses for RFIs
Once registered, RFIs will be allowed to conduct KRW/USD spot/forward and swap trades with other onshore FX market participants, such as local banks and securities companies and other RFIs, through a Korean licensed FX broker. RFIs will also be able to transact in KRW/USD spot/forward and swap trades with non-resident clients directly without going through a Korean licensed FX broker. However, please note that the FX trades must be settled through the onshore KRW/USD accounts, the details of which must be included in the registration application and also must be conducted within the FX forward position limits to be prescribed by the MOEF.
With the introduction of the RFI regime, foreign investors, which previously conducted KRW/USD FX trades only through local financial institutions (including Korean branches or subsidiaries of foreign financial institutions), will be allowed to enter into KRW/USD FX trades directly with offshore financial institutions which are registered as RFIs. The new regime is expected to promote competition in the Korean FX market.
Regulatory Obligations of RFIs and Designation of Agents
Under the Guidelines, RFIs are required to report certain trade details to the Bank of Korea and to confirm whether client trades are subject to reporting requirements under the foreign exchange laws of Korea.
In the case of foreign financial institutions without a presence in Korea, these tasks can be outsourced to a Korean financial institution designated by an RFI (referred to as “Agent” under the Guidelines) and the designation of the Agent must be reported to and approved by the MOEF at least seven days prior to the execution of the relevant outsourcing agreement. Further, an RFI will be allowed to borrow funds from its Agent without filing an FX report and to conduct KRW/USD spot/forward and swap trades with the Agent without going through a locally licensed FX broker.
RFIs will be supervised by the Bank of Korea.