Seoul to restrict currency trading data to banks

To insulate the local currency market from speculative trading, Korea will restrict access to real time currency trading data beginning February, the Bank of Korea said yesterday.

The won`s real-time match price and inter-bank bid and offer prices versus the dollar will be open only to banks, which will then provide offshore and corporate customers with reference rates, the central bank said.

The measures were prepared by the Seoul Foreign Exchange Market Committee, comprising the Finance Ministry, the central bank, brokerage service companies and registered member banks.

The highlight of the revamped trading system is the separation of the inter-bank trading market from transactions for other market participants such as corporations, hedge funds and individual customers, the BOK said.

"The reform is aimed at reducing market volatility while increasing market size," said Oh Jae-kwon, head of the foreign exchange market team at the BOK. Oh spearheaded the bank`s efforts to enhance the efficiency of the foreign currency market.

The new system will be implemented as scheduled barring technical problems, he added.

The latest move came as the government is preparing to remove all restrictions on foreign exchange trading for full-fledged market liberalization.

The government recently annonced a deregulation scheme scheduled for implementation on Jan. 1. The measures abolish the required permissions for capital transactions. Under the revised regulations, the ceiling on overseas direct investment by Koreans was raised to $3 million from the previous $1 million. Investments worth $100,000 or less are exempt from the obligation of submitting a statement on accounts.

Korea, which was hit hardest by the 1997-98 foreign currency crisis, has opened the foreign exchange market on a measured pace.

At present, bidding prices and other real time information are open to all the market participants. Such trading practices are not widely used in advanced markets because they increase fluctuations in exchange rates, officials said.

Korea and Taiwan are among the few countries in the region where match price and inter-bank bids and offers on their currencies are open to the public.

Under the new trading system, companies and offshore traders will not be able to access the real time information shared by foreign exchange banks. All the currency transactions among nonbank market participants will be made based on the "reference rate" among foreign exchange banks.

In Korea, 58 banks including 18 local banks and two foreign brokerages such as Merrill Lynch and Morgan Stanley are allowed to trade foreign currencies.

The information asymmetry between foreign exchange banks and other currency market players should increase the role of banks as a market maker.

Until now, banks have played a role as a broker rather than a market maker in the local currency market.

A market maker is a bank or a brokerage company that stands ready every second of the trading day with a firm ask and bid price.

Korea`s foreign exchange market has nearly tripled in daily trading volume to an average of $4.5 billion from $1.6 billion in April 1999, when the current quotation system was introduced.

Non-deliverable forward markets, which refer to offshore currency markets operating in foreign countries like Hong Kong and Singapore to provide investors with a tool to hedge risks from spot trading, have turned into an arena for speculative trading.

With full access to real time inter-bank trading information, off-shore players with ample cash contributed to increasing the volatility of the currency move, making the local currency market more vulnerable to speculative transactions.

(jungmin@heraldm.com)



By Kim Jung-min