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Market reforms to boost interest in KTB trading, study finds


25 July 2024 South Korea
Reporter: Daniel Tison

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Image: tawatchai1990/stock.adobe.com
An International Capital Market Association (ICMA) survey has revealed a “significant untapped” market potential in Korea treasury bond (KTB) trading.

Conducted in collaboration with Bloomberg, the survey suggests that recent market reforms can generate increased interest in KTB trading.

These include operational reforms such as the “simplified process for third-party onshore foreign exchange”, the “abolition of the investment registration certificate”, and the “omnibus account”.

The anticipated use of the omnibus account for KTB trading has garnered attention, with 56 per cent of respondents indicating plans to utilise this facility.

Survey participants agreed that the likely impact of the three measures will make KTB trading easier, says ICMA.

The study surveyed more than 300 individuals within the global financial sector to assess the impact of existing reforms from a market stakeholder’s perspective, and to understand market expectations of further reform initiatives in Korean capital markets.

As part of its findings, the survey suggests that 91 per cent of respondents had never engaged in KTB trading.

The majority (88 per cent) of those who had never traded KTBs do not have a clear plan to enter the market in the near term.

Mushtaq Kapasi, ICMA’s chief representative for APAC, says: “Our KTB market survey not only demonstrates the significant untapped opportunities for both international investors and Korean issuers, but more importantly, the willingness of these investors to consider KTBs as part of their portfolios.”

The survey suggests that clearing with international central securities depositories (ICSDs) and allowing the South Korean won (KRW) to be tradable offshore could be factors which drive market participants to consider entering the KTB markets.

Consistent across all participant types, respondents who had traded KTBs had done so mostly for portfolio diversification. However, they experienced difficulties when trading KTBs offshore.

Bing Li, head of APAC at Bloomberg, says: “Key reforms, such as offshore KRW trading and ICSD clearing, are potential catalysts to attract new market participants.

“Technological enhancements and infrastructure improvements could also be real game-changers for increased participation in the markets.”

Survey respondents also commented on the strategic improvements in the KTB markets, such as developing a robust e-trading platform for KTBs, as well as leveraging AI, blockchain, and straight-through processing (STP) measures that would reduce settlement costs and improve operational efficiency.

Ensuring high-quality collateral availability would boost market confidence, participants said, and implementing delivery versus payment (DvP) clearing arrangements with custodians would streamline settlement processes and reduce settlement risks.

Promoting the use of the Global Master Repurchase Agreement (GMRA) for repo trades would standardise and streamline transactions, the respondents added.

Looking ahead, there is cautious optimism for the KTB markets' growth and a positive impact expected from the inclusion of KTBs in global major indices.

In May 2024, Bloomberg and ICMA shared preliminary findings of the survey with the Ministry of Economy and Finance (MOEF) of South Korea.

In response, Sang Hyun Kwak, MOEF’s director of the Government Bond Policy division, said: “Despite uncertainties in global markets, Korea remains one of the most dynamic economies in Asia and continues to be on a growth trajectory, presenting opportunities for global investors.”

According to Kwak, enhancing global investor access to the KTB markets is a key priority of the Korean government and Korean regulators.

He added: “We have been launching a set of measures to simplify the trading of KTB and KRW, and will continue to optimise infrastructure to facilitate foreign participation in KTB markets.”
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