South Korea Limits Banks' Access to Currency Derivatives After Won Gains

South Korea plans to tighten curbs on banks’ holdings of foreign-exchange derivatives, lowering existing limits by a fifth, according to an official at the country’s financial regulator.

Local branches of overseas banks will be allowed to hold contracts equivalent to no more than 200 percent of their equity capital, down from 250 percent currently, and the cap for domestic banks will be cut to 40 percent from 50 percent, said the Financial Supervisory Service official, who declined to be identified because the plan isn’t public yet. The finance ministry will announce the changes in January, he said.

Nations from China to South Africa are striving to limit currency volatility as near-zero borrowing costs in the U.S. and Japan spur demand for higher-yielding assets in emerging-markets. South Korea’s existing limits on banks’ use of currency derivatives took effect in October and are subject to review every three months.

“They’re obviously concerned about trying to control capital inflows and limit the impact this could have on the currency,” said Brian Jackson, Hong Kong-based senior strategist at Royal Bank of Canada. “But I’m a little bit skeptical that this is a really big deal. I think it’s already been pretty well-flagged in advance and the market has sort of accepted that there are going to be a few limited measures.”

The Korea Economic Daily newspaper reported the planned tightening two days ago, citing unidentified officials at the finance ministry and the Bank of Korea, and said the new limits on derivatives holdings will probably take effect in March.

Limited Impact
The planned changes aren’t expected to have much impact as foreign banks’ local branches currently have contracts totaling no more than 150 percent of their equity capital and domestic banks’ holdings are 10 percent or less, the Financial Supervisory Service official said. Exporter demand for currency- hedging products is also unlikely to be affected, he said.

The government earlier this month said it will impose a levy on banks’ foreign-exchange borrowings to help curb capital flows. The National Assembly on Dec. 8 passed a bill that will from Jan. 1 restore taxes on foreign investors’ holdings of the nation’s bonds.

The Korean won rose 0.1 percent today to close at 1,146.35 per dollar in Seoul, according to data compiled by Bloomberg. The currency has gained 1.5 percent so far this year and, according to analysts surveyed by Bloomberg, will gain 9.2 percent by the end of 2011.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net Frances Yoon in Seoul at fyoon2@bloomberg.net.
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net Sandy Hendry at shendry@bloomberg.net.