24-hour foreign exchange trading next year…foreigners to freely trade bonds and stocks

The domestic foreign exchange market will be open 24 hours starting next year. This is a preparatory move for inclusion of the Korean stock market in the Morgan Stanley Capital International (MSCI) Developed Markets Index.

The Ministry of Economy and Finance announced these foreign exchange market improvements on the 26th at the "Korea Investment Summit" held in New York, USA. After the event, President Lee Jae-myung said he would announce a comprehensive roadmap for MSCI developed market inclusion within the year.

The government plans to extend trading hours to 24 hours to eliminate trading gaps for overseas investors. Currently, the foreign exchange market operates from 9:00 a.m. to 2:00 a.m. the next day, and only onshore KRW-USD spot market trading was possible. Currently, foreign exchange trading is possible only through two intermediaries authorized by the government. Participation in foreign exchange trading has also been narrowed to major commercial banks. This is to control foreign investors' won trading due to the trauma of the foreign exchange crisis.

However, these control mechanisms have weakened foreign investors' access to won trading. Many view this as a major obstacle to inclusion in the MSCI Developed Markets Index. MSCI also requires a foreign exchange market where free currency conversion is possible offshore.

A system of "offshore won settlement institutions" will also be established so that foreigners can freely settle, hold, and procure won offshore. The Bank of Korea will also newly build a 24-hour won settlement network to support won settlements at night. Through this, the plan is to absorb offshore non-deliverable forward (NDF) trading into the domestic market.

Korea was classified as an emerging market in 1992 and was placed on the watchlist in 2008 as a candidate for developed market index inclusion, but it was excluded from the watchlist in 2014 and has remained an emerging market for 11 years. If Korea is included in the MSCI Developed Markets Index, it is estimated that up to $30 billion (about 42 trillion won) could flow into the domestic stock market.

The government, the Bank of Korea, and major financial firms will form a task force (TF) for MSCI developed market index inclusion and plan to announce a comprehensive roadmap within the year.

Ik-hwan Kim, reporter lovepen@hankyung.com