ED Korea's 24-hour FX trading
Employees at work at Hana Bank headquarter's dealing room, Monday, as the 24-hour won-dollar spot trading took effect. Yonhap
Vigilant oversight of 24-hour won-dollar trading will be key to success
The launch of the 24-hour won-dollar weekday trading for Korea's onshore market on Monday is a somewhat belated but appropriate push toward gaining developed market status in the MSCI global index and enhanced currency convertibility. Moreover, it should be a move toward stabilizing the weak Korean won.
Monday's step would keep the spot trading open from 6 a.m. through Saturday at 6 a.m., allowing late-hour trading, except on Jan. 1 and during the weekends. It is an easing of a tightly monitored foreign exchange trading system largely set in place after the 1997-98 financial crisis, enhancing currency convertibility. Finance Minister Koo Yun-cheol said that it would be the "starting point for the won's global leap." Yet, the move has both foreseeable benefits and downsides that must be managed through vigilant oversight.
Looking at the 24-hour trading through an optimistic lens, Korean firms will have better access to hedge against late-hour foreign exchange volatility. Korean retail investors who invest in the U.S. bourses would enjoy more convenient access to foreign exchange transactions as well. Foreign investors putting their money in the Korean market can carry out their foreign exchange transactions even after business hours in Asia.
To date, the price of the nondeliverable forwards (NDF) formed during the late hours has affected the domestic market, with less time for authorities and banks to respond once the market opens at 9 a.m. the next morning. Seoul has more time to absorb and respond to the shocks, and the anticipation is that there would be less need for NDF transactions.
However, there are causes for caution. Some experts point out that the smaller trading volume and smaller liquidity during the overnight period can develop into sharper volatility even in cases of relatively minor external shocks.
The round-the-clock trading is part of the current administration's efforts to earn developed market status on major global indexes, particularly the MSCI, which, once secured, could resolve the so-called "Korea discount" long affecting businesses here. Korea is included in FTSE Russell's World Government Bond Index, but not in the MSCI.
The recently launched 24-hour foreign exchange trading would be one of the first steps to address the currency convertibility that the MSCI cited in rejecting Korea's submission this year. And, despite the risks, there are predictions that 24-hour won-dollar trading could lead to the won's medium-to long-term stability with real-time liquidity for global investors and corporate hedgers.
Financial authorities and banks must work together to manage late-hour liquidity and detect any warning signs. Further opening the market requires watchful vigilance against external shocks and speculative moves.
The way in which authorities and the banks manage the new foreign exchange trading system will be a gauge of a more advanced status. The won has been particularly struggling. Since breaking through the 1,500 won level in March, the won has more or less remained in that territory. It is significant; the 1,500 won level to the dollar was last marked in 2009.
A combination of elements that affect supply and demand is behind the continued weakening of the won. The red-hot rally of the Korean bourses is also marked by continued foreign sell-offs, while firms and retail investors are inclined to hold onto the strong dollar. Vigorous management and thorough oversight are enhancing the attractiveness of the Korean won and the foreign exchange market will be crucial as Korea looks to take additional steps to upgrade its financial system.