The government extended the closing time of the foreign exchange market from 3:30 p.m. last July to 2 a.m. of the following day to stimulate market activity, but the transaction volume during the extended hours has not increased significantly. The government is pursuing various measures to strengthen liquidity, but the market response is lukewarm. Some advise that registered foreign institution (RFI) transactions should be activated.
According to the financial sector on the 16th, the average daily transaction volume during the extended hours (from 3:30 p.m. to 2 a.m.) in January was about $1.913 billion. This shows little change compared to July of last year ($1.905 billion) right after the extension. This was based on an analysis of the weekly transaction volume (average daily) from the first week (Dec. 30 to Jan. 3) to the fifth week (27 to 31).
◇ Transaction volume stagnation… Foreign exchange market far from 'activation'
Specifically, ▲ last July $1.905 billion ▲ August $1.248 billion ▲ September $1.632 billion ▲ October $2.506 billion ▲ November $1.615 billion ▲ December $1.615 billion ▲ January this year $1.913 billion. After exceeding $2.5 billion in October last year, it returned to previous levels.
The proportion of transaction volume during the extended hours in the overall foreign exchange transactions has also not changed significantly. In the first month of the extension, July, the transaction volume proportion during the extended hours was 16.1%, but it has only slightly expanded to about 18.5% now. Monthly, except for October (22.1%) and November (20.3%) last year, it has remained below 20%.
With no increase in transaction volume during the extended hours, there has been no progress toward the government's goal of drawing offshore non-deliverable forward (NDF) transactions to the domestic market. According to the Bank of Korea, the average daily NDF transaction volume of non-residents, which recorded $13.62 billion in the second quarter of last year, increased to $14.056 billion in the third quarter right after the extension of trading hours. In the fourth quarter, it fell to $13.06 billion, but compared to the same period last year (fourth quarter of 2023, $11.41 billion), it showed a significant increase.
This is because the RFI (Registered Foreign Institution) system newly introduced by the government has not achieved the expected results. According to the financial sector, the transaction volume through RFIs accounts for only 1-2% of the total transaction volume during the extended hours. With a daily average of about $20 million to $40 million, this is considered minimal when looking at the overall transaction size of the foreign exchange market.
A foreign exchange dealer, requesting anonymity, said, "For night-time transactions to activate, the actual demand from overseas customers centered on RFIs needs to increase, but there is still insufficient incentive for them to participate in the domestic market," adding, "The advantages of the won are not highlighted compared to currencies from neighboring countries such as the yuan or yen, which have abundant liquidity."
◇ 'There is a system, but… the transaction volume is low, so there's no reason to utilize it'
Experts point out that while the intention behind the introduction of RFIs is good, it is not compatible with market trading practices and therefore has not been activated. A source in the financial sector noted, "The government has introduced a new system, but since there are no issues with foreign exchange settlements using the existing methods (transactions through bank contracts), there is no need to use RFIs, and practical incentives are necessary for the RFI system to take root."
Another market participant remarked, "The foreign exchange market must have high transaction volumes to ensure liquidity, but if only a limited number of market participants are trading as it is now, uncertainty could actually increase," adding, "More robust incentives are needed for actual market activation."
The government is also preparing measures to activate transactions. The Ministry of Economy and Finance announced in January plans to enhance liquidity during the extended hours of the foreign exchange market and is pursuing revisions of enforcement rules to allow the expansion of current transactions (transactions for payments such as salaries and rent) through RFIs. Additionally, domestic financial companies have made it possible to engage in electronic foreign exchange trading (eFX) through automatic algorithms even during nights when human dealers are not working.
However, experts agree that additional measures are needed. A market source pointed out, "While it is true that transaction volumes are gradually increasing, the RFI system is still in its infancy," commenting, "For the system to take root, there must be certainty that it is more advantageous to transact through RFI than existing methods." Another market source said, "The offshore market must shrink for domestic transaction volume to increase," suggesting, "We might consider regulating the NDF market or imposing additional expenses on transactions."