The Bank of Korea closely monitors the risks of record-high NDF trading

Golden Ten Data reported on July 14 that, according to Korean media, the Bank of Korea, as the main foreign exchange regulator, regards offshore forward trading as one of the causes for high exchange rates. According to the “International Financial and Foreign Exchange Market Trends” report released by the Bank of Korea on the 14th, in the second quarter, the average daily trading volume of non-deliverable forward (NDF) foreign exchange contracts participated in by foreign investors reached 22.77 billion US dollars, an increase of 3.87 billion US dollars from the previous quarter's 18.9 billion US dollars. This figure marks a quarterly record high since statistics began in 2018 and accounts for 76% of the total trading volume of domestic currency hedging products (30 billion US dollars) during the same period. NDFs are offshore forward contracts traded in overseas markets, which investors or companies use to hedge against exchange rate fluctuations between the US dollar and the Korean won. Some believe that exchange rates and trading volumes in the nighttime offshore market will affect Korea’s domestic market the following day, thus causing a “tail wagging the dog” phenomenon (that is, the secondary market influencing the main market). In addition, due to relatively lax regulation, there are concerns that the market is more susceptible to shocks from speculative forces.