Foreign investors had their funds tied up for a day due to currency exchanges and financial network operational hours when trading bonds in Korea, but this will no longer be the case as same-day settlements become possible. The government has decided to extend the operational hours of the Bank of Korea's financial network and the Korea Securities Depository (KSD) to allow funds exchanged on the same day to be used for securities settlements.
Lee Hyung-il, the Vice Minister of Economy and Finance, held a meeting on the 14th at the International Finance Center in Jung-gu, Seoul, titled 'Foreign Exchange Soundness Council and Morgan Stanley Capital International (MSCI) Developed Market Index Inclusion Task Force (TF).' Officials from the Financial Supervisory Service, the Bank of Korea, the Financial Services Commission, the Korea Exchange, and the KSD were present at the meeting.
During this meeting, improvements to the settlement infrastructure for foreign investors were discussed. Typical securities settlements require the generation of settlement data by the KSD and the matching of trading information, followed by the transfer of funds between financial institutions through the Bank of Korea's financial network to complete the process.
Considering the closing time of the Bank of Korea's financial network and the time required for KSD procedures, domestic custodian banks must receive settlement funds from investors by the morning of the settlement day to enable same-day securities settlements. Based on market practices, the deadline for remittance is set at 11 a.m. to take into account the time needed to submit evidence proving that the transaction is not a naked short sale.
Additionally, for foreign investors to remit securities settlement funds, foreign currency transactions were also necessary. To secure Korean won through foreign currency simultaneous settlement, it must be between 3 p.m. and 6 p.m. Korean time. This means that Korea's time zone is ahead of major international financial markets, causing the remittance timing for settlement funds to be earlier than the foreign exchange settlement timing. Because of this, foreign investors had to secure won in advance the day before settlement or use won loans on the same day.
During this meeting, related agencies extended the operational hours of the Bank of Korea's financial network from 5:30 p.m. to 8 p.m. to facilitate smoother same-day payments for foreign investors. They will also allow for fund transfers between financial institutions after the closing time of CLS simultaneous settlement. The Bank of Korea plans to change the system with a goal of applying it by April next year.
The operational hours of the KSD's bond settlement system will also be extended. The KSD will shorten the time required at each settlement stage so that if investors remit settlement funds by 6 p.m., same-day settlements can be achieved.
With the settlement timing for securities being delayed compared to the current situation, the burden of unsettled securities reporting for domestic custodian banks will be alleviated. The unsettled securities reporting system entails custodian banks reporting the status of their clients' securities shortages and unreceived settlement instructions to the exchange on the settlement day to prevent naked short sales. Delays in settlements caused by foreign investors' foreign exchange transactions will be reported as a separate reason, and the submission frequency for reports will change from monthly to quarterly.
The Vice Minister noted, 'This improvement in settlement infrastructure will directly alleviate the inconveniences faced by foreign investors,' adding that it is a significant measure to enhance the perceived accessibility of our capital markets.
Related agencies have agreed to identify key improvement tasks such as foreign exchange liberalization, streamlining foreign investment procedures, and increasing the efficiency of settlement and clearing systems to achieve MSCI developed market index inclusion, and to establish specific execution plans. It was also agreed that tasks that can be rapidly implemented will commence before the planned roadmap at the end of this year.