Seo Young-kyung, KFTC Member: "Foreigners' Government Bond Futures Trading Has Significant Side Effects... Institutional Improvement Needed"

Seoyoungkyung, Member of the Monetary Policy Committee

Seo Young-kyung, a member of the Financial Monetary Policy Committee, stated on the 15th, "Foreigners' trading of government bond futures has significant side effects such as increased volatility in long-term market interest rates and constraints on the transmission effects of monetary policy, so appropriate institutional improvements are necessary."

Seo attended a joint policy forum on the theme of "Policy Tasks of Korea's Capital Market," hosted by the Korea Capital Market Institute and the Korean Economic Association at the Financial Investment Center in Yeouido, Seoul, where she expressed these views.

She focused on the phenomenon of concentration in foreigners' government bond futures trading, which increases the volatility of long-term market interest rates, and analyzed its background and improvement measures.

Seo explained that during the periods of expanded foreign selling of government bond futures from September to November last year and May to June this year, the speed of long-term interest rate increases accelerated and volatility rose.

In the past, during periods of rising or falling domestic and foreign interest rate expectations, net selling or net buying of government bond futures expanded, causing significant volatility in government bond yields. In contrast, foreigners' spot trading steadily increased, showing low correlation with government bond yields, and the phenomenon where futures trading influenced spot trading (wag the dog) occurred frequently.

Foreigners' investment in government bond futures has positive functions such as enhancing futures market liquidity, but there are also considerable side effects like concentration in foreigners' futures trading during periods of rapid domestic and foreign interest rate changes and increased volatility in long-term market interest rates.

Seo analyzed the impact of foreigners' government bond futures trading on spot interest rates using daily data from January 2011 to June 2022 with a lag distribution-stochastic volatility (ADL-SV) model, and the results clearly showed the impact of foreigners' futures trading on the level and volatility of spot interest rates.

Seo said, "While maintaining a stable net buying trend in foreigners' futures trading, it is necessary to establish an investment environment that aligns with international standards to mitigate concentration caused by speculative trading," adding, "for example, it is necessary to change the settlement method from cash settlement to physical settlement to prevent holding only futures positions."

She continued, "Also, like major countries such as the United States, Germany, and Australia, it is necessary to limit the number of open contracts to a certain level to mitigate the risk of large-scale position adjustments."

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