Currency Forward Trading Under Tighter Scrutiny
By Na Jeong-ju
Staff Reporter
The Bank of Korea and the Financial Supervisory Service will launch a joint inspection of currency forwards trading by firms and banks as early as next week to stem rapid growth in the country's short-term external debts, the central bank said Tuesday.
Regulators believe that currency forwards transactions by firms and banks have become more speculative in recent months amid expectations that the Korean currency will gain further strength against the dollar.
Banks have taken advantage of the dollar's global weakness to increase their short-term overseas borrowing, dealing a blow to the country's efforts to contain the won's rapid gain.
``We will cooperate with financial regulators for an investigation into forwards transactions by companies and banks,'' the BOK said in a statement. ``Speculative forwards trading caused the recent surge in short-term overseas borrowing, and that can negatively affect the financial market, if not dealt with carefully now.''
Based on the outcome of the inspection, the BOK will draw up a list of firms and banks that were involved in ``inappropriate'' currency forwards dealings and take disciplinary action against them, the bank said.
The exact schedule for the probe has not been finalized, but it will start as early as next week, and end by the end of next month, it said.
Under the Foreign Exchange Transaction Law, regulators and the central bank have the right to inspect currency-related transactions by firms and banks, but it is rare for them to do so.
The action reflects concerns that a rise in short-term debts will undermine the country's economic growth and destabilize the financial market.
The rises of short-term external debt can be attributed to multiple factors, such as banks balancing their books, exporters' hedging activities and the rises in the yen-denominated borrowing.
Analysts say, to some extent, hedging activities by exporters via the use of currency forward contracts may have resulted in the appreciation of the Korean won in 2006 and 2007. In anticipation of won appreciation, large ship-builders and export-oriented small and medium enterprises have entered into forward contracts with banks.