Financial Regulatory Forum

Peru regulator adopts rule to combat FX volatility

By Reuters Staff
February 16, 2010

LIMA, Feb 15 (Reuters) – Peru has adopted a rule to limit the positions that banks and pension funds can hold in foreign currencies in a bid to help cut long-term volatility.

The decision, which caps institutions’ foreign currency holdings at 75 percent of their assets from the current ceiling of 100 percent, was published over the weekend in the Peruvian government’s official gazette.

Banks and pension funds will have 90 days to make sure their positions do not exceed the new rule, which also sets institutions’ sales of foreign currencies at 15 percent of total assets.

When the rule was first discussed last October, an official at the central bank told Reuters the long positions of banks in dollars at that time were around 40 percent, suggesting the rule might not cause any rapid changes in the level of Peru’s currency and is mainly aimed at reducing long-term volatility.

“What the banking and insurance regulator and the government is trying to do is make sure traders don’t take advantage of the situation to speculate and exacerbate existing pressures on the sol,” said Roberto Flores, an analyst at brokerage Inteligo SAB in Lima.

Peru’s cental bank has so far bought roughly $1.4 billion this year in the foreign exchange market to keep Peru’s currency, the sol, from strengthening too quickly amid an economic rebound and as investors’ appetite for risk returns.

The central bank’s intervention has helped to keep the sol, which has gained some 1.1 percent so far in 2010, relatively steady. The unit strengthened nearly 8 percent last year.

Last month, the government put in place a 30 percent tax on foreign investors’ profits from short-term currency futures — the latest in a string of measures meant to stem the sol’s momentum.

As a result of decades of financial turmoil, about half of all bank deposits in Peru are held in dollars.

Thanks to the economy’s stability in recent years, the government has periodically adopted rules to encourage lenders and borrowers to move into the local currency as a way to cut currency exchange risks in the financial system.

The sol closed virtually unchanged on Monday at 2.853/2.854 per U.S. dollar, from a Friday close of 2.854/2.855. ((Reporting by Dana Ford and Ursula Scollo, Editing by Gary Crosse)) ((dana.ford@thomsonreuters.com; +511-221-2130; Reuters Messaging: dana.ford.reuters.com@reuters.net))

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