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Hana Bank headquarters' dealing room in Myeong-dong, Seoul South Korea is set to reform the local currency market as the country aims to win MSCI Inc.’s developed market status of the domestic stock markets.The government plans to extend the operating hours of the country’s foreign exchange market and consider allowing offshore financial institutions to trade the won currency directly.“The government will take into account ways to enhance foreign investors' market access and stabilize the FX market," Finance Minister Hong Nam-ki said at a meeting on external economic policy on Tuesday.MSCI, which has been classifying South Korea’s stock market as an emerging market for years, said the country needs to improve its foreign exchange market to win the developed market status. MSCI was known to have also required a reform of the foreign investor registration rule and expansion of short-selling.The country decided to actively enhance the currency market system first as the upgrade of the status is expected to attract more foreign investors, especially global pension funds. Some said it is the right time to reform the market, given the healthy external conditions with foreign exchange reserves at a record high and sovereign ratings stable.The government will set up improvement plans around next month after collecting opinions from market players at home and abroad this month. Then it will start negotiations with MSCI, aiming to get the stock market placed on the watch list during the agency’s upcoming June review.LONGER TRADING HOURS, DIRECT TRADINGThe country is slated to increase the trading hours of the local currency market and deliberate ways to permit offshore investors to trade the won.Overseas investors complained that they could not directly participate in the market and it was difficult to make currency exchange after the local market closes, according to a finance ministry’s survey of 50 major global investors that have been conducted since November last year.Currently, the Seoul foreign exchange market opens at 9 am local time and closes at 3:30 pm. The government is mulling an extension of the closing time to 6 pm or 1 am the following day with a discussion of even the 24-hour operation.If each bank in the country adds a team of currency traders to work on extended market hours by 1 am the next day in Seoul, 4 pm in London when financial markets close there, foreign investors are unlikely to face difficulties on foreign exchanges much, a body of South Korea’s FX market participants was understood to have proposed on Monday.The government decided to consider permitting offshore financial institutions to directly trade the won. Currently, only government-approved financial institutions in the country are allowed to participate in the market. In the long run, the country plans to fully liberalize foreign exchange market regulations in order to allow overseas financial institutions to trade the won at offshore markets.“We will definitely push ahead with the extension of the market hours. But we will decide how much we open after collecting opinions from the industry,” said a finance ministry official.NO WORRY ABOUT VOLATILITYSome argued such measures will increase the won’s volatility, but the government played down such concerns, saying the reform is expected to stabilize the market further.“It is difficult for the government to monitor the market under the current system since there are so many offshore deals after the domestic market closes,” said the ministry official. “It is easier to manage volatility if we extend the market hours and bring the offshore trade to the local market.”The current system was set up after the 1997-98 Asian financial crisis when the won plummeted. The government reduced the operating hours of the local currency market and tightened regulations on the soundness of domestic financial institutions’ foreign exchange management in order to control the market.By Jin-gyu Kangjosep@hankyung.comJongwoo Cheon edited this article.
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