The Bank of Korea and the Financial Supervisory Service recently conducted a joint foreign exchange inspection and are said to have detected signs that one global custodian bank may have disrupted the market. Authorities are looking into whether it engaged in front-running by using information on customers' large dollar buy orders.
According to the financial sector on the 26th, the Bank of Korea (BOK) and the Financial Supervisory Service (FSS) have wrapped up a joint inspection of major foreign banks and are reviewing the results. The inspection, which began on the 7th of this month, was carried out to determine whether there were market-disrupting acts, such as moving or fixing foreign exchange rates, with the aim of securing undue profits. Six domestic branches of foreign banks were subject to the inspection, and during the process, signs of unusual transactions at one global custodian bank were reported to have been detected.
Global custodian banks handle asset custody, settlement, and currency exchange in the process of overseas institutional investors investing in domestic stocks and bonds. Authorities are focusing on the possibility that the bank recognized large customer dollar buy orders in advance, first bought dollars with its own funds, and then, as it executed the customer orders and the exchange rate rose, resold the dollars to pocket gains.
Front-running is punishable under the Foreign Exchange Transactions Act. The Foreign Exchange Transactions Act prohibits practices by foreign exchange banks that move or fix foreign exchange rates to obtain undue profits or provide benefits to a third party. Individuals involved can face up to five years in prison or fines of up to 500 million won, and institutions can face administrative sanctions such as a penalty surcharge or business suspension depending on the severity of the violation.
The Seoul foreign exchange market code of conduct (FX Global Code) also bans one-sided transactions aimed at forming prices unfavorable to customers.
However, some say further fact-finding is needed. That is because the transaction in question could have been a routine trading strategy. An industry official said, "When a customer's currency exchange is large in scale, transactions are sometimes split into several parts or delayed in timing," noting that the actual transaction background and intent should be reviewed together. Another official said, "Given the characteristics of the foreign exchange market, foreign banks play a major role in providing liquidity, so careful judgment is required."
An official at the Financial Supervisory Service (FSS) said, "We cannot confirm the details of the inspection." The global custodian bank in question also said, "We do not comment on market rumors."