Changes to market dynamics in Korea
Win Thin and Derrick Leonard uncover the latest developments encouraging foreign investment in the Korean market.
In pursuit of developed market economic status, South Korea has recently implemented several measures to improve investor accessibility and relax FX regulations.
South Korea has long dreamed of achieving developed market status for their economy and eradicating the ‘Korea discount’ in their equity markets. In early 2023, Korean authorities announced several enhancements across their capital markets to address conditions laid out for potential inclusion in the World Government Bond Index (WGBI) when they were added to the watch list in late 2022. While the enhancements eased entry for foreign investors as well as corporate governance, several notable changes announced also impacted the Korean FX market.
What’s changed?
In January 2023, Korea announced the elimination of the Investor Registration Certificate (IRC) requirement when opening investment accounts and allowed investors to use their Legal Entity Identifier (LEI) to open accounts. Korea also stopped requiring investors to open cash accounts in their name at banks other than their local custodian to execute 3rd party FXs related to security investment. These measures started the process to improve accessibility for investors and to relax FX regulations allowing freer movement of capital in the market.
Notable enhancements:
- Registered Foreign Institution (RFI): RFIs would be authorized by the government to participate in the interbank FX market for FX swap and spot transactions. To become an RFI, offshore financial entities would need to register with the MOEF and submit to Korean regulation. Once approved, RFIs would be expected to establish credit relationships with many onshore banks, with a portion reserved for ‘key’ onshore banks identified by the MOEF. RFIs would be expected to maintain regular, consistent FX volume to deepen liquidity access for foreign investors.
- Extending FX market hours: The MOEF extended the FX market hours to the London close, with plans to eventually be open 24 hours.
The RFI program and extended market hours went live on a trial basis in January 2024, with official implementation in June of the same year. Volumes have been muted and bid/offer spreads are a bit wider than the onshore FX market, but activity is expected to pick up once Korean Government Bonds are included in the WGBI.
New challenges ahead:
The RFI program initially intended to deepen liquidity, support extended hours, and give investors more FX options, however, existing prohibition of overdrafts on foreign investor cash accounts discouraged investors from pursuing FX away from their local custodian.
To address this challenge, the MOEF allowed foreign investor account overdrafts related to security settlement. The goal was a temporary OD facility to avoid security settlement failure related to delayed receipt of the 3rd party FX KRW payment. Despite this announcement, local banks have been slow to implement OD lines as it is unclear who would be providing the credit lines. The local custodians maintain relationships with global custodians, while the local cash accounts are held in the end investor name.
Industry reactions and ongoing challenges:
Implementation of these enhancements by local banks has been slow, as the Korean authorities have been looking to Korean banks to determine how best to provide support.
- To truly open the FX market, true offshore entities will need to access the FX market and be comfortable with the regulatory requirements that come along with that access.
- The market has not settled on a solution to offering overdrafts. Until that is done, foreign investors will need to assume the risk of security failure if they utilize FX banks away from their custodial line in the market.
The MOEF has been embarking on multiple roadshows to publicize Korea’s inclusion in the WGBI and all the changes to the FX market. The messaging emphasizes the openness of the market and why Korea is well positioned for investors.
At BBH, we continue to maintain our international reputation as seasoned leaders with recognized expertise and access in emerging markets. We continue to monitor developments in Korea, and work with our local providers to support the market changes and to be prepared for Korea’s inclusion in the WGBI in November 2025.
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