S.Korea restricts trading in FX forwards

November 19, 2009

   By Seo Eun-kyung and Cheon Jong-woo
   SEOUL, Nov 19 (Reuters) – South Korea announced measures on Thursday aimed at tightening control over foreign exchange liquidity to make the banking system less vulnerable to the capital flight seen during the financial crisis.
   The Financial Services Commission, a financial watchdog, said the measures would enhance the soundness of banks’ foreign currency assets in Asia’s fourth-largest economy that is heavily reliant on exports.
   But the regulator said the country would not try to directly control foreign currency liquidity conditions at foreign bank branches in the country, although the branches would be subject to new regulations on forward deals.
   Authorities appear to be looking at ways to avoid a repeat of the capital flight that occurred during the global financial crisis, partly triggered by worries about the ability of companies to roll over their foreign debt liabilities during the global credit crunch.
   One measure called on banks to hold at least 2 percent of their total foreign assets in foreign treasury bonds rated A or above, or set aside a certain amount of safe foreign assets, such as treasuries, in proportion to the value of liabilities maturing within a year.
   The measure will not apply to foreign bank branches in the country. However, restrictions were placed on both local banks and foreign bank branches in trading foreign exchange in forward markets.
   “Exporters’ excessive FX hedging boosted short-term foreign currency debts worsening the credit crisis last year. As the economy heavily relies on external factors, we may face the same situation if we experience another crisis,” said Jeong My-young, a currency strategist at Samsung Futures.
   “The authorities are showing their determination to minimise the potential impact from hedging practices,” she added.
   The steps are expected to weaken bets for a firmer won <KRW=> as exporters will be less aggressive in buying the local currency, traders said.
   A large chunk of foreign currency debt relates to forward currency hedging by shipbuilders — South Korea is home to the world’s three biggest such as Hyundai Heavy Industries <009540.KS> and Daewoo Shipbuilding <042660.KS> — to cover billions of dollars in new ship orders.
   Banks have had to borrow short-term dollars to square their foreign-currency positions after taking up dollar/won forward offers from shipbuilders.
   For a FACTBOX on the measures, click here. [ID:nSEO196381]
   “Next year, the won will not necessarily rise further,” said a currency trader at a foreign bank in Seoul.
   Reflecting the view, the won turned lower with falling as much as 0.4 percent in the morning, although it is up almost 9 percent since the start of the year. (Additional reporting by Kim Yeon-hee; Editing by Neil Fullick) ((jongwoo.cheon@thomsonreuters.com; +82 2 3704 5665; Reuters Messaging;jongwoo.cheon.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))
Keywords: KOREA ECONOMY/CONTROL 
  
Thursday, 19 November 2009 05:35:09RTRS [nSEO238632] {C}ENDS

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