Forex trading store

By Yoo Choonsik and Cheon Jong-woo

SEOUL, June 13 (Reuters) – South Korea announced forward Sunday long-anticipated curbs on banks’ currency trades, saying it aimed to curb in short-term foreign debt and volatile capital flows that posed a venture to the world’s ninth-biggest exporter.

The authorities, alarmed through the won’s sharp swings during recent market turbulence caused by Europe’s debt problems, have been priming investors for weeks in spite of action aimed at stabilising its currency and cooling overseas borrowing.

The well-flagged recently made known restrictions slap limits on banks’ and other financial institutions’ currency forwards, trial-currency swaps as well as non-deliverable currency forwards.

‘These measures are aimed at reducing the fickleness in capital flows that poses a systemic risk in the nation instead of driving the exchange rate into a specific direction,’ South Korea’s finance ministry, two financial regulators and the central bank said in a fit together statement.

‘The country needs to prepare ‘a minimum set of preservation tools’ that fully reflect the special features … such as the region’s high volatility in capital flows,’ the statement said, adding that the just discovered steps reflected a global trend towards tighter regulation of banks’ smartness.

The curbs, expected to take force in October, will apply to as well-as; not only-but also; not only-but; not alone-but domestic and foreign banks, but official data showed foreign bank branches are the ones that determination be immediately affected.

FOREIGN BANKS ABOVE LIMIT

The new rules devise cap domestic banks’ and non-bank financial institutions’ currency forwards and derivatives at 50 percent of their justice capital. The cap for foreign bank branches was set at 250 percent of uprightness to account for their lower capital, which on average is proper 1/30 of that held by domestic banks.

However, foreign banks’ publicity derivatives positions amounted to just over 300 percent of capital, season domestic banks’ exposure totalled 15.6 percent of equity capital, management data showed.

Banks will have up to two years to comply entirely with the new limits, the authorities said, addressing market concerns that the renovated rules could lead to more, not less, market volatility if banks and investors were given mean time to adjust.

In another effort to calm markets, the precedents said they were ready to help if the new controls led to increased abrupt-term market volatility.

The won weakened in the past week in anticipation of the curbs, but closed 0.4 percent higher on Friday in a sign that investors obtain largely factored in the new rules.

LOPSIDED MARKET

The authorities before-mentioned South Korea’s economy was more vulnerable to market gyrations than chiefly of its peers because of its high short-term foreign liability.

The debt is equivalent to 60 percent of foreign reserves — intimately twice the ratio in Indonesia or Malaysia — and largely reflects each imbalance in the forward market caused by heavy dollar selling by shipbuilders and other big exporters.

This depresses the cost of dollars, form borrowing the U.S. currency and swapping into won particularly magnetic.

In addition, banks need to offset long dollar positions in their deals by exporters with dollar borrowing, which also drives up short-term misdoing volumes, leaving South Korea exposed to a sudden dollar squeeze, resembling to that which followed the collapse of Lehman Brothers in September 2008.

In etc. to limits on currency trades for banks, the authorities tightened the curbs steady companies’ currency derivatives trades announced in November, lowering the ceiling to 100 percent of the estimation of their physical foreign trade transactions from the initial 125 percent.

The central bank desire also take steps next month to limit foreign-currency lending ~ means of banks to local companies by allowing such lending only to finance documented deals with foreign entities.

(Additional reporting by Kim Yeon-hee; Writing ~ means of Tomasz Janowski; Editing by Paul Tait))

((choonsik.yoo@thomsonreuters.com; +82 2 3704 5580; Reuters Messaging: choonsik.yoo.reuters.com@reuters.net)) Keywords: KOREA ECONOMY/

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