The lack of convertibility of the local currency has stood in the way of South Korea’s reclassification into the Morgan Stanley Capital International’s developed market index.

To Korea’s market oversight authorities, however, allowing local currency to be exchangeable offshore appears to be the least likely option out of fears of compromising stability in currency trading.

MSCI Chairman Henry Fernandez has reiterated the stance Monday in Seoul that Korea, currently included in the MSCI emerging market index, falls short of meeting the criteria for the upgrade, citing global fund operators’ views and their calls to revamp the foreign currency exchange system in the Korean market.

In a meeting with the Financial Services Commission Chairman Yim Jong-yong at the FSC headquarters, Fernandez said the lack of the won’s convertibility offshore has marred the market accessibility, crucial for market reclassification, according to the FSC Tuesday.

The remarks implied that Seoul’s omnibus account system for foreign investors, which Fernandez called an effort worth acclaim, stopped short of improving Korea’s market accessibility.

Since the accounts were introduced in stock markets in March and in derivative and bond markets in June, omnibus accounts allow an asset management company to conduct transactions on behalf of multiple foreign investors. The FSC deemed them prerequisite to ease capital inflows and outflows.

Fernandez’s words came in response to Yim’s remarks that Korea is eligible for entry into the advanced market index of MSCI, citing a robust economy and capital market, while stressing its effort to ease the offshore accessibility, including adoption of omnibus accounts this year and extension of market’s closing hours by 30 minutes in August 2016.

Yim, however, opposed easing the foreign exchange market during the meeting, while putting emphasis on exchange market stability, which the FSC had long called crucial for “small and export-driven economy.”

Korea was excluded from the list for potential reclassification to developed market index since 2014, six years after MSCI started reviewing the upgrade in 2008. Other than the won’s lack of convertibility, the lack of a 24-hour currency exchange system was picked as a hurdle for the upgrade.

The attempts to return to the review list each year have ended in failure. If re-entered on the list, the nation would undergo MSCI’s review for reclassification next year.

The June inclusion of China’s Class A Large Cap shares in the MSCI emerging market index added to calls for Korea’s MSCI upgrade, as investments into the emerging market index have become more likely to end up in China’s markets.

MSCI indexes are widely seen as some of the world’s most widely tracked benchmarks, used by over 500 exchange-traded funds.

By Son Ji-hyoung (consnow@heraldcorp.com)