South Korea’s equity, fixed income and currency markets are substantial in size but remain very tightly regulated; the controls currently in place, which apply to both domestic and offshore institutions, have detracted from overall liquidity in key financial instruments. In the equity market overseas investment in local stocks can only be accomplished by obtaining qualified foreign investor (QFI) status; free foreign access to Korean stocks is not yet a reality. In the fixed income market, though the country is in the process of widespread interest rate deregulation which will be completed by 1997, many local money and bond market instruments must still adhere to government dictated interest rates; in addition, foreign investment in local bonds is still extremely restricted. In the foreign exchange market, though regulatory changes are underway which will eventually lead to full convertibility of the Korean won, restrictions on foreign currency trading have dampened liquidity in spot and forward FX. As a result of strict controls impacting liquidity in key financial instruments, the market for local derivatives based on such instruments is still underdeveloped.
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