Will Korea make FTSE Russell’s global bond index?

Market pundits are eagerly watching if FTSE Russell, the London-based global index provider, would include Korea in the World Government Bond Index-an essential global benchmark for sovereign debt. The decision is more likely to be made public by FTSE Russell on October 8. WGBI is a market capitalization weighted index that tracks the markets of government bonds from various economies.

Another area to be pointed out is whether Korea should be included in the list of countries for investigation, which may influence Korea’s exclusion from the FTSE index. This is because Korea has been imposing restrictions on short selling since as long ago as 2009, and it would expire by the end of next March; only naked short selling will remain, since it was “legislated against” by the National Assembly.

Although FTSE Russell considers the Korean equity market a developed market, MSCI still classifies it as an emerging market. Funds from the United States more often track MSCI indexes, while European funds track FTSE indexes. Market sources report that Korea’s inclusion in the WGBI would be its third attempt in three tries.

If it is included, it would take at least six months up to a year for its full incorporation into the index, which would potentially channel around $50 billion in 65 trillion won into the Korean bond market.

Optimism is growing over inclusion, particularly since it has been on the watch list since September 2022. The setting up of necessary institutional frameworks to improve accessibility of the bond market has also strengthened its feel-good factor as a necessary condition for inclusion.

The decision also depends on the global investor sentiment as represented in index tracker surveys. Market accessibility may be delayed a second time in the event the survey results indicate that Korea’s market accessibility is still not standard with the world.

Global bank HSBC supports the inclusion of Korea, citing improvement in its market accessibility rating in supporting the rationale.

Investor interest goes beyond the sovereign index to the resumption of short selling, especially regarding Korea’s prospects for the MSCI listing. Financial Services Commission Vice Chairman Kim So-young said last December that the elimination of naked short selling was more urgent than an MSCI World listing.

Such two major issues are part of long-term strategies to improve Korea’s financial system. “It is fortunate byproduct for Korea to make it into MSCI,” said Kim.

“Our goal is to achieve sound returns for investors, which will then support listed companies with their financing of operations. This will help drive growth in industries and the economy, creating a virtuous cycle,” he noted.

Korea banned short selling on November 6 last year following illegal naked short selling activities by BNP Paribas and HSBC, which reached a combined 56 billion won.