South Korea Central Bank Monitors Record NDF Trading Risks

South Korea’s central bank said it is closely monitoring risks tied to record trading in non-deliverable forward (NDF) contracts. According to Jin10, South Korean media reported that, as a key foreign-exchange regulator, the Bank of Korea views offshore forward trading as one factor contributing to elevated exchange rates. In its report titled International Finance and Foreign Exchange Market Trends, released on July 14, the Bank of Korea said average daily trading volume in NDF foreign-exchange contracts involving foreign investors reached $22.77 billion in the second quarter, up $3.87 billion from $18.9 billion in the previous quarter. The report said this was the highest quarterly level since tracking began in 2018. The Bank of Korea said the NDF volume accounted for 76% of total trading volume in products related to hedging the local-currency exchange rate, which totaled $30 billion over the same period. The report described NDFs as offshore forward contracts traded outside South Korea, used by investors or companies to hedge exchange-rate fluctuations between the U.S. dollar and the South Korean won. It also cited a view that exchange rates and trading volumes in the overnight offshore market can influence South Korea’s domestic market the next day, creating a “tail wagging the dog” dynamic in which a secondary market affects the primary market. The report added that relatively looser regulation has raised concerns that the market may be more vulnerable to speculative shocks.