Korea's Forex Market Transition to 24-Hour Trading Faces MSCI Inclusion Challenges

Starting July 6, the won-dollar forex market will transition to 24-hour trading, marking a significant step in the government's efforts to modernize the forex market. However, experts warn that simply extending trading hours will not guarantee inclusion in the Morgan Stanley Capital International (MSCI) developed market index, emphasizing the need for further reforms, such as the internationalization of the won, to enhance accessibility.

According to the government, the shift to 24-hour trading is a key component of its forex market modernization strategy. This change will allow foreign investors to trade the won without time constraints, significantly improving market accessibility. The government hopes this will bring it closer to meeting the market openness standards required by MSCI.

Inclusion in the MSCI developed market index is one of the main goals of the government's capital market modernization initiative. MSCI classifies global stock markets into developed markets (DM), emerging markets (EM), and frontier markets, with many global passive funds adjusting their investment allocations based on these classifications.

However, market analysts believe that merely extending trading hours will not be sufficient to meet MSCI's criteria. MSCI evaluates various factors, including foreign investor access, the freedom of forex transactions, payment convenience, and regulatory predictability.

In fact, MSCI did not include South Korea in its watchlist for potential inclusion in the developed market index as of June 23, citing the inability to conduct offshore physical delivery of the won and insufficient liquidity in the domestic forex market as limiting factors.

This suggests that even with extended trading hours, if foreign investors cannot freely obtain and settle transactions in the won offshore, the perceived improvement in accessibility may be limited.

The government is now pursuing the internationalization of the won as the next step in opening the forex market. The Ministry of Economy and Finance plans to announce a 'won internationalization roadmap' this month, aimed at enhancing the infrastructure for won trading and settlement, and facilitating foreign investors' access to the won offshore. The government also intends to expand the use of the won in current transactions and introduce an offshore won payment system starting in January next year.

Experts agree that the key to MSCI inclusion lies more in the internationalization of the won than in the mere extension of trading hours. While increasing trading hours is a first step toward improving market accessibility, a conducive environment for foreign investors to trade and settle transactions in the won without inconvenience is essential to meet MSCI's market openness standards.

Choi Kyu-ho, a researcher at Hanwha Investment & Securities, stated, "The 24-hour opening of the forex market could increase volatility, but it is a necessary step, regardless of whether it happens sooner or later. Foreign institutional investors consider global rebalancing, internal regulations, and risk management comprehensively, so expecting a significant shift in investment direction solely from extended trading hours is unrealistic."

As the internationalization of the won progresses, there are calls to strengthen market stability measures to accommodate increased capital movement. The government also plans to enhance external safety nets alongside market opening.

Heo Jang, the Second Vice Minister of Economy and Finance, emphasized, "The forex authorities have sufficient capacity to respond, and if the exchange rate deviates from fundamentals and excessive concentration occurs, we are prepared to implement necessary market stabilization measures immediately."