Korean Stock Market Fails Again to Join MSCI Developed Markets Index

"Problems Such as Offshore Won Trading Restrictions Remain Unresolved"

Korea's inclusion in the MSCI (Morgan Stanley Capital International) Developed Markets Index has once again failed to materialize.

On June 23 (local time), MSCI announced the results of its "2026 Annual Market Classification Review" and did not place Korea on the watchlist for potential inclusion in the Developed Markets Index.

Although the Korean government has pushed for institutional improvements such as opening the foreign exchange market, expanding English-language disclosures, and resuming short selling, MSCI determined that the market accessibility perceived by global investors still does not meet the standards required for developed markets.

Regarding market accessibility in Korea, MSCI stated, "We acknowledge the measures announced by the Korean financial authorities to address longstanding concerns," but added, "Investors believe that fundamental issues have not yet been fully resolved."

The biggest obstacle was the issue of Korean won convertibility. MSCI pointed out, "The Korean won is not physically deliverable offshore." This means the won is not a currency that can be physically exchanged and settled in the international foreign exchange markets outside of Korea. Currently, the won is mainly traded in the form of offshore non-deliverable forward (NDF) contracts, which are settled in U.S. dollars without the physical delivery of the currency.

Korea has implemented measures such as extending foreign exchange market trading hours into the night and allowing overseas financial institutions to participate in the domestic foreign exchange market. However, MSCI assessed that won liquidity during extended trading hours remains insufficient. In particular, MSCI noted that global institutional investors who manage index-tracking funds find it difficult to execute large-scale trades and rebalancing transactions at desired times with tight bid-ask spreads.

MSCI emphasized that, like other developed market currencies, the Korean won needs to demonstrate deep and stable liquidity during nighttime trading, along with consistently low bid-ask spreads, to international investors. Simply lengthening trading hours is not sufficient to meet developed market standards.

Issues also persist regarding trading and settlement infrastructure for foreign investors. MSCI pointed out that the use of omnibus accounts and the physical transfer system remains limited. Despite the introduction of the Legal Entity Identifier (LEI) system following the reform of the foreign investor registration process, MSCI noted that practical friction continues during the transition from the existing registration framework.

The short selling system was also cited as a burden. Although Korea fully resumed short selling at the end of March last year, MSCI found that market participants are experiencing significant operational burdens under the newly implemented illegal short selling prevention and monitoring framework. The requirement for early settlement funds was also mentioned as a factor restricting market accessibility for foreign investors.

MSCI stated, "For potential market reclassification discussions to proceed, all raised issues must be addressed, reforms must be fully implemented, and market participants need sufficient time to assess the ongoing impact of these changes." This means that, before Korea can resume discussions on inclusion in the Developed Markets Index, it must prioritize the stable settlement of these systems in the market and the securing of investor confidence over simply introducing new systems.

Meanwhile, MSCI, a global index provider, classifies stock markets worldwide into Developed, Emerging, Frontier, and Standalone categories for its indices. Currently, the MSCI Developed Markets Index includes major developed markets such as the United States, Japan, and the United Kingdom, while Korea remains grouped in the Emerging Markets Index alongside countries like China and India.

Since being included in the MSCI Emerging Markets Index in 1992, Korea was first placed on the watchlist for possible inclusion in the Developed Markets Index in 2008. However, repeated concerns about market accessibility, such as restrictions on won convertibility, the foreign investor registration system, and limitations on the use of exchange data, have led to postponements. In 2014, MSCI even removed Korea from the watchlist for developed market consideration.

This content was produced with the assistance of AI translation services.