An increasing number of foreign banks without a physical presence in South Korea are gearing up to offer dollar-won conversion services to non-Korean residents.

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Starting this year, the country will expand the horizon of overseas-based financial institutions’ foreign exchange service beyond the dollar-won conversion for non-resident stock and bond investors.

The move comes as South Korea is set to join the FTSE World Government Bond Index, or WGBI, in November this year amid the sharp decline in the won following President Yoon Suk Yeol’s impeachment last month.

Germany’s Commerzbank, Canada’s Toronto-Dominion Bank, French bank Natixis and the US-based Northern Trust are waiting approval for participating in the domestic interbank forex market, according to the Ministry of Economy and Trade on Friday.

They have no domestic office or have withdrawn from Korea, said an official of the finance ministry. The four banks are set to join 40 other registered foreign institutions (RFIs), including some Taiwanese banks.

RFIs are authorized to trade the won on the spot market and engage in currency swaps in South Korea’s interbank forex market.

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They will now be allowed to exchange foreign currencies into the won for Korean exporters transferring foreign currencies into their home.

South Korea expects some $66 billion-$77 billion inflows of foreign funds into domestic financial markets after it is included into the WGBI.

The WGBI is one of the world’s four major benchmark indices alongside those of S&P, Dow Jones and MSCI.

About $3 trillion in funds worldwide is estimated to track the WGBI, which includes government bonds from more than 20 countries such as the US, the UK, Canada and Japan.

With new RFIs joining the domestic forex market, the government expects the Korean won to reduce its volatility. An increase in demand for the Korean currency could help the government sell treasury bonds at a lower coupon rate than before.

Over the past two years, South Korea has been loosening forex regulations as part of efforts to join the WGBI and the MSCI Developed Markets Index.

In October 2023, the government extended the operating hours of the domestic forex market, allowing foreign currency dealers to directly participate in the Korean won transaction system.

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But it has yet to be upgraded to the developed market index by MSCI.

In the longer term, South Korea is considering allowing non-residents to directly buy and sell Korean stocks without opening an account at a Korea-based bank or brokerage company.

Currently, non-residents without a bank or brokerage account in Korea can trade Korean bonds through the International Central Securities Depositories (ICSDs).

Write to Kwang-Sik Lee at [email protected]
Yeonhee Kim edited this article.