Night-time trading in foreign exchange derivatives in South Korea has topped $110 billion about two months after the country's currency market began operating around the clock. The shift suggests the influence of offshore non-deliverable forwards (NDFs) on the won-dollar rate, long blamed for distorting the market, is starting to wane. Analysts said Korea needs to build the won's competitiveness to a level befitting the world's fifth-largest trading nation, and that expanding derivatives trading could be the first step.
Forwards and foreign exchange swaps traded through brokerages during night hours — from 3:30 p.m. to 6 a.m. the following day — totaled $111.54 billion between July 6, when 24-hour currency trading began, and Aug. 31, according to Bank of Korea data submitted to the office of lawmaker Kim Nam-joon on the 12th. Average daily night-time volume over the period was about $2.8 billion, equal to 4.3% of the roughly $65 billion in average daily volume in the second quarter, before round-the-clock trading started. The share remains small, but it is significant that derivatives trading is taking place after the former trading day ends.
The trend is encouraging because it could reduce the sway of offshore NDF trading, which had produced a wag-the-dog effect in Korea's currency market. The Seoul foreign exchange market closed at 2 a.m. until June, so overseas investors traded NDFs mainly during those hours, and the resulting volatility spilled over into the won's exchange rate, in the central bank's assessment. NDFs have been singled out as a key driver of sharp swings in the won-dollar rate because they settle gains and losses in dollars alone, without requiring the won.
Offshore NDF volume is also declining. Won-dollar NDF turnover fell to an average $30.9 billion a day in September from $35.4 billion in June, according to Depository Trust & Clearing Corp. data compiled by Bloomberg. "If liquidity in the domestic night-time market becomes sufficiently deep, more institutional investors could come in," said Kang Kyung-hoon, a professor of business administration at Dongguk University.