South Korea Will Tighten Curbs on Currency Derivatives After Won Advances
May 13 (Bloomberg) -- Young Sun Kwon, a Hong Kong-based economist at Nomura Holdings Inc., talks about the South Korean economy, central bank monetary policy, and currency. The Bank of Korea unexpectedly kept interest rates unchanged after two increases this year, opting to judge whether a won appreciation will contribute to a slowdown in inflation. Kwon speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
May 11 (Bloomberg) -- Stuart Oakley, Singapore-based head of emerging markets foreign exchange for Asia at Royal Bank of Scotland Group Plc, talks about the region's currencies and the dollar. Asian currencies advanced, led by South Korea’s won and Taiwan’s dollar, as gains in stocks and commodities boosted confidence in the global economic recovery, increasing investor appetite for emerging-market assets. Oakley also discusses China's economy. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
South Korea said it will tighten limits on the amount of currency derivatives banks can hold as it seeks to curb swings in capital flows and the won.
Local branches of overseas banks will be allowed to hold currency derivatives contracts equivalent to no more than 200 percent of equity capital, down from 250 percent, and the cap for domestic banks will be reduced to 40 percent from 50 percent, the finance ministry said in a statement late yesterday.
The won has strengthened 3.7 percent this year after advancing 3.4 percent in 2010, putting pressure on an economy that depends on exports for half its output. Regulators have probed banks including Credit Agricole SA (ACA), ING Groep NV (INGA) and Standard Chartered Plc (STAN) amid concern derivatives are contributing to a buildup in short-term external debt that makes South Korea vulnerable to shocks from overseas.
“The move is sensible and should help to limit volatility of capital flows,” said Wai Ho Leong, an economist at Barclays Capital in Singapore.
South Korea’s currency rose 0.35 percent today to 1,082.45 per dollar as of 2:40 p.m. in Seoul, according to data compiled by Bloomberg.
Forward Markets
The changes to derivatives caps will take effect on June 1, with one-month grace period, and come as emerging countries from Brazil to Thailand take steps to cool currency gains and slow inflows of foreign money. South Korea will consider adjusting the caps each quarter, according to yesterday’s statement.
South Korean exporters such as shipbuilders have been selling the dollar for the won in forward markets to hedge expected export income. Banks on the other side of these transactions typically borrow dollars to lock in an exchange rate and reduce risk.
The nation’s short-term debt from overseas jumped the most in three years in March, rising by $6.72 billion, central bank data showed.
“High short-term external debt can increase volatility in the FX market and the wider economy, especially if the global economy and financial markets deteriorate suddenly,” Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., said yesterday before the announcement. “The government sees market expectations for the dollar-won largely one-way, for rise in the won, and they believe this is unwarranted speculation.”
Smoothing the Won
Finance Minister Yoon Jeung Hyun said in an interview on May 3 that South Korea will smooth “extreme volatility” in the won. The jump in external debt at some financial companies prompted the Financial Supervisory Service to inspect currency derivatives transaction, Yoon said on April 22.
The ministry also said yesterday that it will come up with regulations for kimchi bonds soon, without giving details. Sales of kimchi bonds, or foreign-currency debt sold in South Korea, has also driven the increase in short-term external debt, Deputy Finance Minister Choi Jong Ku said April 28. Kimchi bonds sales rose to about $3.7 billion for the first quarter of this year, compared with $6.1 billion for all of 2010, Choi said.
South Korea is considering stricter regulation of foreign currency-denominated bonds sold in the nation in cases where the seller converts the proceeds back into won, Financial Services Commission Vice Chairman Shin Jae Yoon told reporters today.
Bank Probes
The 12-month non-deliverable forward rose 0.3 percent to 1,108.45 dollar yesterday, a 2 percent discount to the spot rate. Forwards are agreements to buy and sell assets at current prices for delivery at a future specified time and date. Non- deliverable contracts are settled in dollars.
The Financial Supervisory Service said on April 25 it would audit currency derivatives at Credit Agricole, ING Groep, Standard Chartered First Bank Korea Ltd. and Woori Finance Holdings Co.’s main banking unit and then begin inspecting more companies. The regulator hasn’t disclosed the outcome of its investigations and spokesmen for the banks declined to comment on the matter.
ING Bank NV’s Seoul branch may ask its headquarters for more equity or cut its currency derivatives position to meet the new foreign exchange rules, the branch manager Jeroen Plag told reporters today in Seoul.
South Korea has introduced several “macro-prudential” measures to reduce volatility in capital flows and trading of the won. It first initiated the caps on banks’ holdings of foreign-exchange derivative in October 2010 and revived taxes on foreign investors’ bond holdings in January.
The government plans to impose a levy on non-deposit foreign-currency liabilities held by domestic and foreign banks beginning Aug. 1, with short-term debt facing higher charges.
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
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