South Korea Will try to Control Hot Money With Curbs on Currency and Derivatives

“South Korea said it will tighten limits on the amount of currency derivatives banks can hold as it seeks to curb swings in capital flows and the won.

Local branches of overseas banks will be allowed to hold currency derivatives contracts equivalent to no more than 200 percent of equity capital, down from 250 percent, and the cap for domestic banks will be reduced to 40 percent from 50 percent, the finance ministry said today in a statement.

The won has strengthened more than 3 percent this year, putting pressure on an economy that depends on exports for half its output. Regulators have probed banks including Credit Agricole SA (ACA), ING Groep NV (INGA) and Standard Chartered Plc (STAN) on concern derivatives are contributing to a buildup in foreign debt.

“High short-term external debt can increase volatility in the FX market and the wider economy, especially if the global economy and financial markets deteriorate suddenly,” Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., said before the announcement. “The government sees market expectations for the dollar-won as largely one-way, for rise in the won, and they believe this is unwarranted speculation.”…”

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