South Korea Moves to Allow Foreigners Direct ETF Trading

FSC Says on May 25 It Will Preannounce Amendments to Expand Omnibus Accounts to ETFs and ETNs

South Korea’s financial authorities are accelerating efforts to revise the system to allow foreigners to directly trade exchange-traded funds (ETFs) and exchange-traded notes (ETNs), with introduction expected in the second half of the year.

According to the Financial Services Commission on May 25, it plans to complete the preannouncement of legislation for amendments to the Regulations on Financial

Photo courtesy of the Financial Services Commission.

Investment Business next month and expand the scope of transactions under omnibus accounts for foreigners from the current stocks to include ETFs and ETNs.

An omnibus account is a system that allows individual foreign investors to trade domestic stocks even without having an account at a domestic securities firm.

With the benchmark KOSPI recently surpassing 8,000, inquiries from overseas securities firms about direct ETF trading have been increasing. In addition, while overseas ETFs are available in South Korea, foreign investors face difficulties investing domestically, highlighting the need to align with global standards.

From on April 26 last month to on May 15 this month, the trading value through omnibus accounts for foreigners was tallied at 5.8 trillion won ($4.23 billion), while net purchases came to 2.2 trillion won ($1.60 billion). The scale is expected to grow further if foreign ETF funds flow into the domestic market.

If foreigners are allowed to directly trade ETFs, authorities expect a stabilizing effect on the exchange rate from increased foreign currency inflows.

Ahead of the system’s introduction, tax law revisions are also needed. Under the current tax law, withholding tax applies to dividend income from foreign investment in stocks, but ETFs and ETNs are excluded from that requirement, creating the need for institutional adjustments. A related tax law amendment is likely in July.

Financial authorities plan to push ahead with follow-up procedures through regulatory changes and a no-action letter once the withholding tax issue is resolved. After that, introduction in the second half of the year is considered possible following changes to securities firms’ contracts and improvements to computer systems.

Yoon Young-sil