Offshore Trades of Korean Bonds Triple as Reforms Gain Traction

Offshore trading in South Korean bonds has witnessed a significant surge, with volumes nearly tripling in September 2024. This rapid growth can be attributed to a series of operational reforms aimed at enhancing access for foreign investors. The Korea Securities Depository (KSD) anticipates a further increase in volume as more institutions begin live trades.

Extended trading hours and simplified trading processes have played a pivotal role in boosting offshore trades. By extending trading hours for the won and making it easier for overseas investors to trade local notes, Seoul has improved liquidity and attracted global funds. This move aligns with the country's goal of joining the FTSE Russell's World Government Bond Index, which could bring billions of dollars worth of fresh capital.

The omnibus account has emerged as a crucial facilitator of offshore trades, enabling a steady and gradual increase in the number of participants and transaction volumes. This account allows overseas investors to trade Korean bonds more efficiently, reducing operational complexities and costs. The KSD expects many institutions to start using the omnibus account for live trades in the near future.

Recent operational reforms, such as the abolition of the Investment Registration Certificate and the simplified foreign exchange process, have also contributed to the increase in offshore trading volumes. These reforms have made it easier for foreign investors to navigate the Korean bond market, thereby encouraging greater participation.

Global investors perceive the potential benefits of clearing with International Central Securities Depositories (ICSDs) and offshore KRW trading for KTB markets. A survey conducted by Bloomberg and the International Capital Market Association (ICMA) revealed that nearly half of the respondents expressed heightened interest in KTB trading due to recent operational reforms. The anticipated use of the omnibus account for KTB trading has garnered significant attention, with 56% of respondents indicating plans to utilize this facility.

To further streamline access and efficiency for foreign investors in the Korean bond market, additional measures are needed. Technological advancements, such as the development of a robust e-trading platform for KTBs, can improve transparency, efficiency, and accessibility for domestic and international investors. Leveraging AI, blockchain, and Straight Through Processing (STP) measures can also reduce settlement costs and improve operational efficiency. Ensuring high-quality collateral availability and implementing Delivery Versus Payment (DVP) clearing arrangements with custodians will also bolster market confidence and streamline settlement processes.