South Korea Eases FX Regulations to Attract Foreign Capital

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South Korea Eases FX Regulations to Attract Foreign Capital

South Korea has announced a series of measures to facilitate foreign exchange (FX) transactions for offshore investors who want to participate in the country’s stock and bond markets. The policy aims to improve the convenience and efficiency of foreign investment, reduce the risk of settlement failure, and promote capital inflows amid the global pandemic and trade tensions.

The Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service jointly announced the measures on Wednesday, February 21, 2024. The revisions reflect the opinions of foreign investors, including those collected during the recent Investor Relations session in London held by First Vice Minister Kim Byoung-hwan earlier this month.

One of the key changes is to allow foreign investors’ overdrafts of Korean currency over the course of their FX transactions. Under the current law, local financial institutions are prohibited from granting overdrafts to foreign investors in order to prevent the mass selling of the Korean won in the event of a crisis. This led to concerns about settlement failures, especially when foreigners were to engage in currency trading with third parties.

South Korea has allowed foreign investors to trade currencies with a third party - not only local custodian banks which they mainly traded with - since last year to help slash extra trading costs, but concerns of possible settlement failures hindered them from benefiting from the eased rule. With the revision, foreign investors will be automatically authorized for temporary overdrafts from their custodian banks once they notify the banks that they have FX transactions in progress with other financial institutions.

Another change is to ease regulations on the use of Korean currency exchanged through an International Central Securities Depository (ICSD). ICSDs are financial organizations specializing in settling trades in international securities. Currently, international investors who already have an account open under their name in a local bank cannot transfer money to or from their ICSD account, or vice versa, and must retrieve the money from the local bank to change it into foreign currencies and then reinvest via ICSDs. The reform will allow investors to freely transfer their money between their local accounts and ICSD accounts, and utilize their existing Korean currency holdings to newly participate in ICSDs, as long as they can verify the funds belong to them.

The government also plans to reintroduce the ICSD omnibus account services starting this June in its efforts to get included in the World Government Bond Index, a widely followed sovereign debt index that would attract long-term private investment funds. Collective investing through an omnibus account will also be made easier.

The new policy is expected to have a positive impact on the South Korean economy, as it will increase the attractiveness and accessibility of the country’s financial markets for foreign investors. According to the government, the measures will help induce the improvement of supply and demand in the bond market by offering tax incentives for retail investors who invest in corporate bonds and adjusting government and public bond issuance. The policy will also stabilize the financial and FX markets by expanding foreign capital inflows and foreign investment.

The government hopes that the policy will enhance the country’s financial market competitiveness and openness, as well as cope with the challenges of the global pandemic and the U.S.-China trade war. The government also pledged to continue to monitor the FX market conditions and take necessary actions to maintain stability.



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