South Korea moves to let foreign investors hold and settle in won from abroad in push for MSCI upgrade

South Korea is building a system that will allow foreign investors to hold, transfer and settle in won through overseas financial institutions — without opening a domestic account — as part of its push for inclusion in the MSCI Developed Markets Index. The government is also drawing up electronic foreign exchange (e-FX) trading guidelines to enable financial institutions to conduct stable, round-the-clock currency transactions without on-site staff, and is moving to ease the won liquidity burden tied to securities settlement.

Of the 39 tasks in the MSCI developed-market inclusion roadmap the government unveiled in January, 30 have been completed, bringing the implementation rate to 77 percent. The government plans to complete three more tasks by year-end, focusing its policy efforts on removing friction that foreign investors encounter in actual trading.

Heo Jang, second vice minister of the Ministry of Economy and Finance, chaired a joint meeting of the Foreign Exchange Soundness Council and the MSCI Developed Market Inclusion Promotion TF at the Korea Federation of Banks building in Seoul on Friday to review progress on the foreign exchange and capital market roadmap and outline next steps. The meeting was attended by officials from the Ministry of Economy and Finance, the Financial Services Commission, the Bank of Korea, the Financial Supervisory Service, the Korea Exchange and the Korea Securities Depository.

With 30 of the 39 tasks across eight areas of the MSCI roadmap now complete, the implementation rate stands at 77 percent. The government plans to finish three additional tasks this year.

The centerpiece of the effort is improving the ease of won-denominated transactions for foreign investors. The government and the Bank of Korea are building a "Bank of Korea Won International Settlement Network" that will let foreign investors hold and transfer won and use it for domestic securities settlement through overseas financial institutions, without needing a separate domestic account.

To that end, the government will revise the Foreign Exchange Transactions Regulations and the guidelines on foreign exchange operations by foreign financial institutions between August and September. A pilot program is set to begin in September ahead of a full launch in 2027. The international financial messaging standard ISO 20022 will also be adopted to support round-the-clock settlement operations and smooth connectivity with the SWIFT network.

The government is also moving to reduce the won liquidity burden that financial institutions must maintain during securities settlement. Starting in September, the Korea Securities Depository's "settlement facilitation funds" — currently payable only in cash — will also be accepted in the form of equities or bonds. From October, securities that an institution is due to receive from the exchange on settlement day will be recognized as collateral, allowing it to take delivery of the securities without separately posting settlement facilitation funds.

The government expects these measures to ease the intraday won liquidity burden on financial institutions.

E-FX guidelines to promote round-the-clock foreign exchange trading will also be released this month. E-FX refers to currency trading that uses electronic price feeds and automated order-execution functions. The guidelines will set out basic principles for electronic foreign exchange transactions and internal control standards covering system stability and market volatility responses, along with a self-assessment checklist for banks and securities firms.

The government expects that once e-FX is more widely used, financial institutions will be able to conduct stable foreign exchange transactions overnight without maintaining on-site staff, reducing both personnel and operating costs.

The government said the 24-hour foreign exchange market that took effect last month has so far settled in stably.

The domestic foreign exchange market has operated around the clock since July 6. The government said market infrastructure has functioned without major incidents such as failed transactions, and the won-dollar rate has remained stable compared with other major currencies.

Average daily spot foreign exchange turnover in the interbank market rose 10.1 percent, from $17.39 billion in the first half of this year to $19.14 billion after the 24-hour market opened. Late-night trading, however, is still growing only gradually, given that the system is in its early stages and time-zone differences with overseas markets remain a factor.

To boost late-night trading volumes, the government will apply weighted multipliers to overnight transaction volumes when selecting lead banks in the won-dollar market. Under the proposed criteria, trades executed between 6 a.m. and 6 p.m. would carry a weight of one, those between 6 p.m. and 10 p.m. a weight of two, and those between 10 p.m. and 6 a.m. the following morning a weight of three. Banks designated as lead banks are eligible for incentives including reductions in the foreign exchange soundness levy.

Going forward, the government plans to use forums such as a "Global Core Investor Consultative Body" to assess whether reforms already in place have taken hold in the market and whether concerns raised by foreign investors have in fact been addressed. Any newly identified investment obstacles will be shared with relevant agencies through the MSCI TF, and additional remedial measures will be developed as needed.