South Korea to Permit Offshore Won Trading for Foreigners in Major Forex Overhaul

South Korea has unveiled a comprehensive plan to liberalize its foreign exchange market, a landmark move that will allow foreign investors to trade the won directly without needing a local presence. The new rules, set to take effect in January 2027, represent the country's most significant step yet toward making its currency fully convertible.

Key Changes to Forex Rules

According to a joint statement from the finance ministry, central bank, and regulators, the reforms will permit foreign investors to conduct unlimited won transactions through foreign financial institutions that are pre-registered with the government. This change eliminates the current requirement for foreigners to open onshore accounts in South Korea to trade the currency.

To facilitate this, the Bank of Korea will establish a new 24-hour settlement network, with pilot operations scheduled to begin in September. Key regulatory changes include:

• Exemptions from advance reporting for most capital transactions between foreigners using the new channel, excluding domestic real estate deals.
• Simplified verification procedures for won transactions at foreign-exchange banks.
• Doubled reporting thresholds for capital transactions, such as won lending to non-residents.

Deepening Offshore Demand

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The government also detailed measures aimed at increasing the won's use and appeal in international markets. Authorities will permit securities lending of South Korean treasury and monetary stabilization bonds between foreign investors through international central securities depositories (ICSDs) like Euroclear and Clearstream.

Additionally, the plan will expand access for foreign central banks and international institutions to the domestic interbank repo market. Non-residents will also be allowed to invest idle won balances in short-term financial instruments, and the government will study incentives to encourage the settlement of international trade in the Korean currency.

Market Implications and Safeguards

These reforms are designed to enhance the won's global standing, potentially boosting liquidity and paving the way for South Korean government bonds to be included in major global indexes. To manage potential market volatility during the transition, authorities have planned a two-tier funding backstop for overnight markets.

Foreign-exchange banks will be the first line of support, providing overdrafts for foreign investors. The Bank of Korea may offer additional liquidity if needed. The country's foreign-exchange stabilization fund may also be used as a backstop until the central bank's new settlement network is fully operational.