Korea will likely take additional actions soon to ease currency volatility by restricting excessive capital flows in and out of its financial markets, informed sources said Monday.
The move would come after the government announced in late November that it will lower the ceiling of foreign exchange forward positions held by local and foreign banks by 25 percent amid the local currency's gain and said that it would take further actions if needed.
According to the sources from the finance ministry and other related agencies, the additional measures under consideration could include tightening rules on the holdings of the foreign exchange forward positions.
In a related move, the government is likely to change the method of measuring the amount of currency derivative holdings subject to the ceilings, to daily transactions from the current monthly average.
Experts worried that the current monthly averaging allows a loophole for banks to hold more currency derivatives than the imposed ceilings if the average amount still stays below the restrictions for the previous month. Checks on daily transactions could prevent banks from holding currency derivatives that exceed the ceilings on any given business day, they said.
"We are looking into measures that could enhance the effectiveness of (already-imposed) rules and regulations," a source said. "Some propose adopting weekly averaging, but it seems that daily checks would have a better impact of improving the effectiveness."
The government is also considering unveiling measures aimed at speculative investments in the non-deliverable forward (NDF) market. Details about those measures have yet to be determined, sources said.
On Nov. 27, the government announced that it will restrict local branches of foreign banks from holding currency forward deals to 150 percent of their equity capital from the current 200 percent. The ceiling for domestic banks will be lowered to 30 percent from 40 percent. The move will fully take effect starting Jan. 1.
Korea took similar steps twice in 2010 and 2011 in a bid to curb rising short-term foreign external debt as part of the so-called macro-prudential measures to stem excessive cross-border capital movements.
Excessive capital flows in and out of its small and open financial markets have been a major concern for policymakers here as they could destabilize its overall economic situation by causing severe volatility in its currency market.
In particular, the won's steep ascent against the dollar in recent months raised concerns that it could hurt the price competitiveness of exports, which is a key growth engine for Korea.
A series of credit rating upgrades on Korea and quantitative easing by major central banks are helping more foreign capital flow to into Asia's fourth-largest economy, making the won appreciate more than 6 percent to the greenback so far this year. (Yonhap)