Unlocking the Future: Reforms in Korea's FX Market Amid Demographic Shifts

Looking more closely at the FX market, Korea has seen value in accumulating sizable FX reserves to provide protection against financial turmoil. However, the government has accelerated efforts over the past few years to adopt a more market-friendly approach and to lift restrictive policy measures.

These have improved the efficiency of the capital market along with Korea’s international investment position, which has shifted from a net debtor to a net creditor position amid growing concerns over a rapidly ageing population.

The challenge for Korea is that right after the Asian financial crisis its merchandise surplus drove the current account surplus, but ageing is a potential cause of the decrease in savings and the current account surplus. Given that Korea has been experiencing one of the fastest demographic changes, there is a possibility that the current account balance will turn into a deficit in the near future. It thus becomes more important for policymakers to establish a virtuous circle of a current account surplus and net foreign asset accumulation, which is one of the major motives behind the ongoing FX market reform efforts. 

 

The reforms

1. Starting with a pilot in early 2024, the largest of the proposed FX reforms is to open up the onshore interbank FX market to Registered Foreign Institutions (RFIs). Currently, the onshore KRW market is only open to local institutions based onshore in Korea. These local institutions can also access the offshore Non-Deliverable Forward market. This means that, unlike the curves in Malaysia, the onshore and offshore KRW forward curves trade very close to each other. The biggest benefit here, however, is that RFIs could quote deliverable KRW forwards to their offshore customers and then clear those with an approved local broker in Korea.
2.  The next biggest reform is the extension of FX trading hours. The current onshore trading hours of 0900-1530 KST will be extended to 0200 KST - a couple of hours after the London close. We hear that local Korean banks in Seoul are preparing to run night shifts to meet this need.  
3. Further proposals centre on the development of market infrastructure in line with global FX markets (aggregators, third-party settlement), plus administrative measures for the new relationships between RFIs and locals and adjustments to the regulatory system.

Structural reforms of Korea's FX market

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