Exchange rates are displayed at a currency exchange in Myeong-dong, Jung-gu, Seoul. Yonhap News
As foreign exchange authorities have repeatedly voiced concern over the offshore non-deliverable forward (NDF) market, NDF trading was found to have significantly amplified the won’s depreciation against the dollar during periods of currency weakness. In particular, the influence of NDF trading during overnight hours, when the Seoul foreign exchange market is closed, was far greater than during the day, prompting authorities to strengthen their monitoring efforts.
The Overseas Investment Analysis Team at the Bank of Korea’s International Department analyzed in a blog post on the 4th that since 2024, net NDF purchases have acted as a factor pushing the won-dollar exchange rate up by about 2 won per month on average. In March, when the won’s weakness was pronounced, 26 won (33%) of the 79-won rise in the exchange rate was attributed to net NDF purchases, while in May, 7 won (26%) of the 27-won rise was estimated to stem from them.
An NDF is a derivative in which the won and dollar principal are not actually exchanged at maturity; instead, only the difference between the exchange rate set at the time of the contract and the rate at maturity is settled. When a foreign investor buys an NDF, the financial institution that takes the other side of the trade conducts an offsetting transaction with a domestic bank to reduce its exchange rate risk, and the domestic bank in turn buys dollars in the spot market—so NDF trading can translate into upward pressure on the domestic spot exchange rate.
Net NDF purchases reflect various demands, including directional investment as well as currency hedging, so they cannot all be viewed as bets on won weakness. However, since net NDF purchases explained a considerable portion of the actual rise in the exchange rate during periods of currency weakness, the analysis suggests they demonstrate the potential for concentration in a particular direction in the offshore market to increase volatility in the domestic foreign exchange market.
The overnight impact was especially large. An analysis of the top 10 months for net NDF purchases since 2024 found that the contribution to the rise in the exchange rate during overnight hours (3:30 p.m. to 9:00 a.m. the next day), when the Seoul market is closed, averaged 12 won per month—four times the 3 won during the day (9:00 a.m. to 3:30 p.m.). Under this structure, after the Seoul market closes, foreign investors react first to global variables in the NDF market, and these movements are reflected in the domestic market the following day.
In the first half of this year, foreign investors’ net NDF purchases totaled 53.9 billion dollars, a record high on a half-year basis.
Bank of Korea Governor Shin Hyun-song said at a press briefing following last month’s monetary policy meeting, regarding the direction for managing the NDF market, “Ultimately, there is a need to bring forward transactions currently taking place offshore into the domestic market to enhance transparency and to further institutionalize access to the won.”
Although the Seoul foreign exchange market transitioned to a 24-hour trading system on the 6th of last month, there has not yet been a clear sign of a decline in NDF trading. The Bank of Korea is preparing to launch a pilot operation of an offshore won settlement system this fall, and how much offshore forward trading can be absorbed domestically through the 24-hour foreign exchange market and won settlement infrastructure is emerging as a key future challenge.
A Bank of Korea official said, “NDF trading itself is not negative; it is a means for foreign investors to manage exchange rate risk and a channel through which global news is quickly reflected in the exchange rate,” while adding, “But since offshore trading concentrated in a particular direction can increase volatility in the domestic foreign exchange market, there is a need to examine it closely.”
