Introduction

South Korea has recently introduced significant changes to its foreign exchange (FX) regulations, aiming to bolster the economy and stabilize the won. These measures include easing restrictions on foreign currency borrowings and expanding FX market hours. However, these reforms have sparked calls for more fundamental changes to address underlying issues in the financial sector.

Background on Recent FX Reforms

In December 2024, South Korea's financial authorities announced plans to ease foreign exchange regulations. This move is designed to allow more dollars into the domestic financial market, facilitating corporate and bank borrowings abroad and helping to defend the won against the dollar. The won had fallen to its weakest level in 15 years, influenced by global economic uncertainty and domestic political factors[1].

Key aspects of these reforms include:

• Raising Ceilings for Forward FX Futures Positions: The ceiling for forward foreign exchange futures positions will be increased to 75% of capital holdings for local banks and 375% for Seoul branches of foreign banks, up from 50% and 250%, respectively[1].
• Allowing Foreign Currency Loans for Facility Investments: Companies can now take out loans in foreign currencies and exchange them for Korean won if used for facility investments like equipment or property purchases[1].
• Expanding Non-Dollar Trade Settlements: The government will allow companies to settle transactions using currencies of partner countries[1].

Impact of Extended FX Market Hours

In January 2025, the Ministry of Economy and Finance announced measures to facilitate trading during extended FX market hours. This includes allowing domestic financial institutions and foreign banks to conduct electronic FX trading without human intervention, enhancing market efficiency and stability[3].

Key Features of Extended Market Hours:

• Increased Participation: Over 40 foreign financial institutions have registered to participate directly in the onshore FX market, leading to an 11% increase in average daily trading volume compared to the previous year[3].
• Expanded Business Scope: Registered Foreign Institutions (RFIs) can now engage in all FX transactions, including those for import/export payments[3].
• Leading RFI Program: Plans are underway to introduce a program promoting RFIs by setting minimum trading volume requirements and extending the grace period for reporting obligations[3].

Calls for Deeper Reforms

While these reforms aim to improve liquidity and stabilize the currency, many experts argue that more fundamental changes are needed to address structural issues in Korea's financial sector.

Need for Structural Reforms:

• Enhancing Financial Market Depth: Critics suggest that Korea needs to develop a deeper and more diverse financial market to reduce reliance on foreign capital and mitigate risks associated with sudden capital outflows.
• Promoting Domestic Investment: Encouraging domestic investment and reducing dependence on foreign funds could provide a more stable economic foundation.
• Improving Regulatory Frameworks: Strengthening regulatory frameworks to ensure transparency and stability in financial transactions is crucial for long-term economic health.

Conclusion

Korea's new FX rules represent a step towards addressing immediate economic challenges, but they also highlight the need for more comprehensive reforms. As the country navigates global economic uncertainties and domestic political shifts, deeper structural changes will be essential to ensure long-term financial stability and growth.