Korea Punishes HSBC, Agricole for Shifting Derivatives Trade to Hong Kong

HSBC Holdings Plc (HSBA) and Credit Agricole SA (ACA) were penalized by South Korean regulators for improperly outsourcing domestic branches’ derivatives trading to their Hong Kong branches.

The Financial Supervisory Service issued a warning to HSBC’s Seoul office for letting Hong Kong-based dealers trade interest-rate and currency-swap derivatives, the agency’s deputy governor of banking supervision Kim Yung Dae said by phone today. Credit Agricole’s Seoul branch was warned for improperly outsourcing over-the-counter derivatives, Kim said.

South Korean authorities are tightening oversight of securities trading by foreign banks on concern that swings in capital flows could disrupt financial markets. The FSS yesterday pledged to beef up investigations of currency trading at global banks’ local offices and impose penalties when they unfairly collaborate with overseas branches on transactions.

The FSS, a privately funded agency that enforces rules set by the government and polices financial institutions, found one European investment bank illicitly let its regional headquarters in Singapore trade financial investment products, said Kim, who declined to identify the bank.

Royal Bank of Scotland Group Plc (RBS)’s Seoul branch is the bank, the English-language Korea Times reported today, citing an unidentified industry official.

The FSS carried out a regular audit of RBS’s business in Seoul and the company will fully cooperate with the regulator, RBS said in an e-mailed response to Bloomberg, without commenting further.

Market ‘Disorder’

HSBC amended its business procedures to bring them in line with the FSS observation and the changes are in place, Chung Chi Yang, a Seoul-based spokeswoman at HSBC, said by phone.

Soo Park, a Seoul-based spokeswoman for Credit Agricole, declined to comment on the penalty.

“We’re increasing inspection of foreign banks’ branches this year beyond scheduled regular inspections as we’re seeing disorder in markets such as the issuance of kimchi bonds,” Deputy Governor Kim said. “Foreign banks’ adjustments of their Asian portfolios could impact on their Korean branches’ portfolios, which can increase volatility in the market.”

Kimchi bonds are foreign-currency securities sold in South Korea. An increase in issuance of the bonds for local use was blamed by the finance ministry for contributing to a rise in short-term overseas debt and the won’s appreciation.

Won’s Gain

South Korea’s won gained more than 4 percent this year, the second-best performer among the 10 most-traded Asian currencies tracked by Bloomberg. Short-term debt from abroad jumped the most in two-and-a-half years during the first quarter, rising by $11.7 billion, central bank data show.

South Korea in May said it will tighten limits on the amount of currency derivatives that banks can hold as it seeks to curb sudden moves in capital flows and the won.

Local branches of overseas banks will be allowed to hold currency derivative 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 on May 19.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.