Taiwan's CTBC Bank registers as foreign exchange dealer in South Korea

A Taiwanese bank is entering the foreign exchange market in South Korea for the first time. Taiwan has many financial institutions that use the won for currency hedging, but until now, they have not conducted transactions directly in the domestic market. Since last year, the government's efforts to improve the structure of the foreign exchange market and its inclusion in the World Government Bond Index (WGBI) have increased demand for the won, prompting the move to explore the market.

According to the Ministry of Strategy and Finance on the 22nd, CTBC Bank, the largest private bank in Taiwan, has been registered as a foreign exchange dealing institution (RFI). CTBC Bank was ranked 111th among the top 500 global banks selected by the British financial magazine 'The Banker' last year and is also considered 'the most valuable financial brand' among Taiwanese financial brands.

RFI is a certification that allows overseas financial institutions to participate in the domestic foreign exchange market. Once registered as an RFI, they can provide won exchange services to foreign customers without having a branch in the country. Currently, a total of 42 institutions are registered as RFIs.

According to the Ministry of Strategy and Finance, in addition to CTBC, Yuanta Bank's Taiwan headquarters is preparing to register as an RFI in early to mid-next month. Yuanta Bank is the seventh largest private bank in Taiwan in terms of asset size. Additionally, 1 to 2 other Taiwanese banks have expressed their intention to register. With Taiwanese banks continuously entering the South Korean foreign exchange market, the nationalities of investors participating in the domestic market have also diversified.

A Ministry of Strategy and Finance official noted, 'When financial institutions from countries that have not previously invested in our country enter the foreign exchange market, it creates new factors that can increase investment.'

The reason Taiwanese banks are particularly interested in the domestic foreign exchange market is that they frequently use the won as a currency hedging tool. Typically, currency hedging involves using the domestic currency. For example, if a drop in the value of the Taiwanese dollar (rise in exchange rate) is expected, a Taiwanese investor who needs to buy $1 a month later can hedge the currency risk by entering into a futures contract to buy U.S. dollars at the desired exchange rate a month later.

However, it is not easy to enter into futures contracts with currencies like the Taiwanese dollar, which have low trading volumes. In this case, they can hedge currency risk by entering into an NDF (non-deliverable forward) contract to buy U.S. dollars at a specific exchange rate using a more liquid currency that moves similarly to their domestic currency. This investment technique is called 'proxy hedge.'

Another Ministry of Strategy and Finance official explained, 'Taiwanese banks primarily target insurance companies as key clients, so currency hedging is important. However, using the Taiwanese dollar limits the scale and methods of hedging, leading to many banks engaging in off-exchange won NDF transactions.'

According to the Ministry of Strategy and Finance, several foreign banks are also knocking on the door of the domestic foreign exchange market in addition to Taiwanese banks. Notable examples include Commerzbank, the largest bank in Germany; Natixis, the second largest investment bank in France; Toronto-Dominion (TD), the second largest bank in Canada; and Northern Trust, one of the world's three largest trust banks. These banks are known to have either never had a branch in the country or withdrew after past operations.

The market believes that the variety of foreign banks going through RFI registration procedures has been influenced by the planned inclusion in the WGBI this November. The WGBI is considered one of the top three bond indexes globally, alongside the Bloomberg-Barclays Global Aggregate Index (BBGA) and the JP Morgan Emerging Markets Government Bond Index (GBI-EM). The total size of funds tracking this index is estimated to be between $2.5 trillion and $3 trillion. The government expects approximately 75 trillion won to flow into the government bonds market as a result of the WGBI inclusion.

Measures to improve accessibility to the foreign exchange market, initiated by the government in July of last year, are also enhancing the attractiveness of the South Korean market. Since July of last year, foreign exchange authorities have taken measures to allow foreign financial institutions to participate in the domestic foreign exchange market and extend the trading hours to 2 a.m. the following day. They plan to prepare a 'leading RFI introduction plan' during the first half of this year to promote RFI transactions.

Foreign exchange authorities plan to lower the entry barriers for foreign financial institutions through further structural improvements. A Ministry of Strategy and Finance official said, 'Currently, when registered as an RFI, only capital-related transactions, such as securities and derivatives (including forward exchange transactions), are possible. However, in the future, we plan to expand this to include regular transactions like salary and rent payments.'