Although MSCI acknowledged the measures announced by the Korean authorities over the last year, it highlighted that multiple structural bottlenecks are yet to be fully resolved.
The Korean won’s “onshore liquidity during the extended FX trading hours remains largely insufficient to support tight execution at standards comparable to those observed in developed markets, MSCI said in the statement. That constrains FX operational flexibility for index replicators and others, it added.
MSCI had already highlighted market accessibility issues for South Korea last week, making the decision largely on expected lines. An upgrade to a “developed market” status would have meant more accessibility, liquidity and operational efficiency for global investors.The index provider had highlighted that South Korea faces market access hurdles including the absence of a fully deliverable offshore won market and operational issues in short-selling settlements. It also highlighted insufficient English-language disclosures of detailed market information.
In a joint statement after the decision, South Korea’s Finance Ministry and Financial Services commission said that the MSCI developed market inclusion will happen in natural course if the country continues to pursue reforms. The statement also added that regular communication channels with major overseas investors will also be activated to review the reform measures announced and seek feedback from market participants.
South Korea was removed by MSCI from its developed market watchlist in 2014, due to restrictions on currency trading and other issues.
The country’s benchmark KOSPI is currently trading 2.5% higher after having declined 10% on Tuesday, with foreign investors offloading shares worth nearly $2.5 billion.
