▶ Diversifying FX Channels for Japanese Investors and Supporting Smoother Investment in KTBs
On Tuesday, February 24, a pilot third-party FX transaction—comprising one spot and one forward transaction—was executed with a Japan-based RFI* (MUFG Bank, Ltd.) acting as the FX bank, and was successfully completed, with fund settlement finalized on Thursday, February 26.
* Registered Foreign Institution (RFI): A foreign financial institution located overseas that is registered with the Korean foreign exchange authorities after meeting the requirements prescribed under the Foreign Exchange Transactions Act to directly participate in Korea’s FX market.
Third-party FX refers to a transaction structure in which an investor executes a foreign exchange transaction with an FX bank of its choice, such as a Registered Foreign Institution (RFI), while settlement is carried out through the investor's custodian bank (see reference). In particular, if third-party FX transactions through Japan-based RFIs become more active, Japanese investors will be able to compare the prices offered by their global custodian banks, with those offered by Japan-based banks with strong local accessibility, and choose the most advantageous option.
To enhance the convenience of FX transactions for foreign investors, the Korean government has pursued institutional improvements, including permitting third-party FX transactions (July 2023). As a result, numerous third-party FX transactions have taken place in major financial centers such as London, New York, Hong Kong, and Australia. In Japan, however, the implementation of third-party FX transactions had been somewhat delayed.
On February 24, an asset management company in Japan successfully conducted a pilot third-party FX transaction. While continuing to use the existing settlement transmission channel via a master trust bank* (Custody Bank of Japan, Ltd.) and a global custodian, the company separately executed the KRW conversion through a local Japan-based RFI (MUFG Bank Ltd.) and directly remitted the converted funds to its domestic custodian bank in Korea (see reference).
* A specialized Japanese trust bank that comprehensively performs FX, custody, settlement, accounting, and reporting functions on behalf of asset managers and pension funds.
In addition, the transaction comprised one spot trade (Spot: the client selling JPY and purchasing KRW) and one forward trade (Forward: the client selling KRW and purchasing JPY), thereby confirming that forward transactions can also be supported under the third-party FX framework.
This pilot third-party FX transaction is particularly significant as it marks an important step toward broadening the range of FX channels available to Japanese investors. If the third-party FX becomes further activated, they are expected to facilitate Japanese investors' participation in Korean Treausury Bonds, ahead of Korea's upcoming inclusion in the World Government Bond Index (WGBI) this April, as Japanese investors constitute a significant share of global WGBI-tracking funds.
Going forward, the government will continue to actively support third-party FX transactions conducted by Japan-based RFI-registered banks* and will further improve transaction conditions in cooperation with master trust banks and global custodians, thereby promoting greater utilization of third-party FX transactions among Japanese investors.
* Third-party FX transactions by banks such as HSBC Tokyo and State Street Tokyo are also forthcoming.
Please refer to the attached files.
