National Pension Fund Explores Measures to Minimize FX Market Impact—Parallel OTC Transactions with Major Institutions < Bonds/Forex < Article

(Seoul=Yonhap Infomax) Ha Rin Song –

Flexible FX hedging strategies are essential for the National Pension Service (NPS) to swiftly respond to heightened currency volatility, according to a research institute under the NPS.

As the NPS expands its overseas investments, the resulting large-scale foreign exchange transactions are seen as an unavoidable source of potential market disruption. To mitigate this, the institute proposed diversifying transaction methods, including parallel over-the-counter (OTC) trades with major financial institutions.

At a pension forum hosted by the National Pension Research Institute on the 26th, Professor Kyung Hoon Kim of Hongik University stated, “With the NPS ramping up overseas investments, fund performance is increasingly exposed to FX risk, while the fund’s own large-scale FX transactions can influence market volatility.” He added, “It is crucial to pursue operational strategies that address FX volatility, minimize market impact from transactions, and improve institutional infrastructure and governance.”

This perspective aligns with remarks made the previous day by Minister of Health and Welfare Eun Kyung Jung at the NPS Fund Management Committee. Minister Jung noted, “FX instability and increased external market volatility remain significant concerns,” and called on the fund management office to “respond closely to ensure both profitability and stability based on thorough market analysis.”

Professor Kim assessed that, amid a global economic slowdown and diverging monetary policies among major economies, FX volatility is likely to remain elevated. In such an environment, he emphasized the importance of flexible FX hedging strategies that can respond rapidly to market changes.

He first recommended strengthening the role of tactical asset allocation (TAA), suggesting a dynamic approach that adjusts the allocation between overseas equities and bonds in response to market conditions.

“This means maintaining long-term target allocations while setting adjustment ranges in line with short-term market shifts,” Kim explained. “During periods of heightened volatility, increasing the hedge ratio can help mitigate short-term losses, while partial hedging during stable periods can support long-term returns.”

Currency diversification was also highlighted as a key response. By strategically including not only the US dollar, euro, and yen but also select emerging market currencies, the impact of sharp movements in any single currency on the overall portfolio can be limited.

To minimize the impact of the NPS’s overseas investment expansion on the domestic FX market, Kim stressed the importance of spreading out transaction timing and size.

“It is effective to reduce transaction volumes during periods of concentrated FX demand, such as month-end or quarter-end, and to take advantage of times when market liquidity is ample,” he said.

Diversifying transaction methods can also enhance market stability. “By not relying solely on direct transactions and instead utilizing OTC trades with major financial institutions, multilateral trading platforms, and block trades, the visible order size in the market can be reduced,” Kim suggested. “This is particularly effective during periods of high volatility or when one-sided market movements are anticipated.”

Finally, Kim emphasized, “To minimize the market impact of fund transactions, smooth information sharing and communication with relevant institutions is necessary. These measures are aimed at enhancing market stability and operational efficiency, not at pursuing specific policy objectives. It is important to ensure transparency and independence so that such actions are not perceived internationally as ‘non-market intervention.’”

hrsong@yna.co.kr

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Ha Rin Song hrsong@yna.co.kr