Overnight trading in foreign exchange derivatives exceeded $110 billion in the two months after South Korea opened its currency market around the clock. Some trading demand that had concentrated in the offshore non-deliverable forward (NDF) market has shifted to the domestic market, raising the prospect of a broader base for won trading. Longer hours alone, however, will not lift the won's international standing. Analysts say follow-up measures are needed to expand liquidity and settlement infrastructure so that overseas investors can freely buy, sell and hold the currency.
Forward and foreign exchange swap transactions through FX brokerages during night hours — from 3:30 p.m. to 6 a.m. the following day — totaled $111.54 billion between July 6 and Aug. 31, according to Bank of Korea data submitted to the office of Rep. Kim Nam-joon of the Democratic Party of Korea on the 13th. That works out to about $2.8 billion a day, or 4.3% of the average daily volume of all FX derivatives in the second quarter, before round-the-clock trading began. The share of the overall market remains small, but it shows that won-related trading continues in the domestic market after regular hours close.
The shift is notable because it can draw demand into Korea that had been concentrated in the offshore NDF market. The Seoul FX market previously closed at 2 a.m., leaving overseas investors reliant on offshore NDFs to hedge won exposure after that. NDFs settle only the difference in dollars at maturity, with no exchange of won. Offshore trading has influenced the domestic spot rate through that channel, and critics have said it amplifies currency volatility.
Offshore NDF trading is also declining. Average daily won-dollar NDF volume fell to $30.9 billion in September from $35.4 billion in June, according to Depository Trust & Clearing Corporation figures compiled by Bloomberg. That suggests the domestic night market has begun absorbing NDF demand. Bank of Korea Governor Shin Hyun-song has described the heavy influence of overnight offshore NDF trading on the spot rate as a case of the tail wagging the dog. FX authorities expect more active onshore trading to reduce the next-day impact of offshore moves on the domestic rate.
It is too early, though, to judge the progress of won internationalization from night trading volumes alone. Longer hours will not bring in overseas financial institutions and institutional investors unless liquidity is deep enough to support actual trading. When counterparties are hard to find or bid-ask spreads widen, trading costs rise, which in turn limits investor inflows. "If liquidity in the domestic night market becomes sufficiently abundant, more institutional investors can come in," said Kang Kyeong-hoon, a professor of business administration at Dongguk University.
Establishing the won as a settlement and investment currency also requires a comprehensive strategy that goes beyond opening the FX market. Won internationalization has long been seen as an unreachable goal, given the dollar-centered international financial order and limited demand for the Korean currency. Conditions are changing, analysts say, as a semiconductor export boom raises Korea's weight in global supply chains and steps such as inclusion in the World Government Bond Index and the move to 24-hour FX trading improve market access.
Cracks in the dollar-centered order are another variable. The dollar's share of global foreign exchange reserves fell to 56% last year from 64% in 2015, according to the Federal Reserve Bank of New York. Central banks have continued to diversify their reserves against a backdrop of U.S. fiscal deficits and geopolitical tensions. It is hard to conclude that the dollar's dominance is weakening now, but some argue Korea should widen the won's use in preparation for a gradually more multipolar currency order.
FX authorities are reviewing follow-up measures. Options under discussion include building an offshore won settlement network and offering incentives to investors who switch from NDFs to deliverable forwards (DFs). Because a DF involves the actual exchange of the agreed currencies at maturity, wider use could increase demand to acquire and manage won. Still, encouraging a shift from NDFs to DFs has limits on its own, and analysts say Korea needs market foundations that allow trading and settlement to proceed smoothly.
"The focus of won internationalization from here should be on whether won liquidity of sufficient size and depth actually forms, rather than on institutional opening or infrastructure itself," said Kim Han-soo, a senior research fellow at the Korea Capital Market Institute.
Over the medium to long term, the won must do more than serve as a trade settlement currency: holders need reasons to keep and invest the won they receive. Demand will grow steadily only if overseas companies doing business with Korea can use won payments for other transactions or investments instead of converting them into dollars. Suggested steps include expanding won settlement within Korea-centered supply chains and developing markets for won-denominated trade finance and financial assets.
"Over the medium to long term, what matters is creating incentives for overseas companies and financial institutions to hold and reuse the won they receive, not just to use it as a means of payment," said Han Jae-joon, a professor of finance and management at Inha University. "Korea needs to expand won settlement within its supply chains and grow won-denominated trade finance and financial asset markets to strengthen the network effects of using the won."
