By Kim Tong-hyung
Korean financial authorities vowed to take a harder look on banks’ trading of foreign-exchange (FX) derivatives in an attempt to detect and curb speculative money flows.
The renewed commitment for capital control comes at a time when the value of the local currency has surged to its strongest level in more than two years and threatens to dent the country’s vibrant exports.
The Bank of Korea (BOK) and the Financial Supervisory Service (FSS) will collaborate on an inspection of local banks from Thursday through May 6 to determine whether the companies have been complying with the country’s new regulations on buying or selling non-deliverable forwards (NDFs), the central bank said Thursday.
An NDF is a foreign currency financial derivative instrument that differs from a normal forward contract in that there is no settlement of two currencies at maturity. Instead, it’s based on the movement of two currencies, with a net cash settlement made between the counterparties.
NDFs are commonly used to hedge local currency risks in developing economies where capital markets are small and restrictions on capital movements are stronger.
“We have a particular interest in monitoring NDF trading at local banks,” a BOK official said.
In June last year, the government announced a set of measures to restrict the volume of trading in foreign-exchange derivatives to ease the risks from short-term flow of capital, which are often a source of volatility in the global economy.
Foreign bank branches were required to cut currency derivatives to 250 percent of equity capital, while the limit was 50 percent for Korean banks. Authorities say they will consider adjusting the ceiling after checking the trading volume of derivatives on a quarterly basis.
The move came as the local currency gained ground against the U.S. dollars as Korean stocks continued to attract a heavy influx of foreign investors. The Korean won closed Thursday at 1,078.90 against the U.S. dollar to mark a 31-month high.
Authorities are worried that the excessive sales of dollar forwards by foreign lenders, as well as the tide of speculative capital, will boost the value of Korean won at a pace they consider as excessive.
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