South Korea to Let Foreigners Trade Won Offshore 24 Hours a Day

Government Unveils Roadmap to Internationalize the Won and Improve Access

Unlimited Won Trading Between Foreigners to Be Allowed

Offshore Won Settlement Network to Start Next Year

Direct Currency Trading for Exporters to Be Expanded

Policy Shift From Crisis Prevention to Greater Openness

Foreigners will be allowed to open won accounts at overseas banks and trade the currency with other foreigners. South Korea’s government plans to create a dedicated channel for offshore won trading as part of its push to internationalize the currency. The aim is to make won transactions easier for foreign investors and encourage investment in won-denominated assets.

Foreigners to Trade Won Through Overseas Banks

The government announced the roadmap on July 19. Lee Hyoung-ryul, director-general for international finance at the Ministry of Economy and Finance, said South Korea’s foreign-exchange policy had focused on crisis prevention since the Asian financial crisis. The policy direction is now shifting toward capturing the economic benefits of a more internationalized won.

The won accounted for 1.8% of global foreign-exchange trading in December last year, ranking 12th in the world, according to the Bank for International Settlements. The dollar led with 89.1%, followed by the euro at 28.5%, the yen at 16.9%, the pound at 10.2% and the yuan at 8.6%. That means the dollar was involved in 89 of every 100 foreign-exchange transactions worldwide. Because each foreign-exchange trade involves a pair of currencies, the combined total adds up to 200%. The government said the won’s global usage remains low relative to the size of South Korea’s economy.

As a first step, the government began operating the foreign-exchange market on a 24-hour basis on July 6, extending trading beyond its previous 2 a.m. close. From January next year, it will also change the method for calculating the reference exchange rate to align it with global standards. The system will shift from a market average rate, or MAR, based on the weighted average of all trades executed between 9 a.m. and 3:30 p.m., to a time-weighted average price, or TWAP, based on selected trades executed during a two-minute-and-30-second window around 4 p.m.

From August, foreigners using offshore won settlement institutions will be allowed to trade won with one another without limits. Those institutions are overseas financial firms that meet certain requirements and register with the Ministry of Economy and Finance. For example, a US asset manager could open a won account at JPMorgan Chase Bank in New York and deposit and hold won for investment in Korean bonds. A German auto-parts company would also be able to pay a Korean supplier in won using balances held at a bank in its home country.

The Bank of Korea will build a new offshore won settlement network to support final settlement of won trades between foreigners. It plans to begin a pilot in September and operate the system around the clock from January next year. Lee said foreigners investing in won-denominated stocks or government bonds currently cannot exchange currency during their daytime hours when it is nighttime in Korea. Removing that restriction is the core of won internationalization.

Expanding Won Supply and Demand

The government is also pushing to expand direct trading between the won and foreign currencies. It plans to establish a local currency trading system, or LCT, with major trading partners so import and export payments can be settled in each country’s own currency. Under the structure, Korean banks would open local-currency accounts at foreign banks, while foreign banks would open won accounts at Korean banks, allowing exporters and importers in both countries to transact directly in their home currencies.

The government also plans to expand trade finance using currency-swap funds. Under that arrangement, if the Bank of Korea supplies won to a partner central bank through a swap line, that central bank would lend the won to importers through domestic banks and pay Korean exporters in won. The government is also reviewing export-finance incentives for overseas buyers that use won when signing contracts for defense equipment, nuclear power plants and other purchases. It also plans to establish a legal basis for the issuance, distribution and trading of won-denominated stablecoins.

Kim Il-gyu / Nam Jung-min, Hankyung.com reporters black0419@hankyung.com