UPDATE 2-S.Korea may further tighten fx derivatives rules as won climbs

Sun Dec 9, 2012 11:39pm EST

Related Topics

* Banks may be required to meet FX derivatives ceilings daily or weekly

* Ceiling requirements currently based on a monthly average

* S.Korea concerned about Korean won's appreciation in recent months

* Future adjustments may include bank levy, NDF market, bond market inflows (Adds comments from deputy fin min, analyst)

By Se Young Lee and Lee Shin-hyung

SEOUL, Dec 10 (Reuters) - South Korea may start checking banks' daily foreign-exchange derivatives positions, finance ministry officials said on Monday, as regulators seek to strengthen the country's defences against rapid foreign capital flows.

Banks are currently required to meet their currency derivatives ceiling based on their monthly average, which officials say allows them to temporarily exceed the limit on some days then roll back the positions to meet the requirements.

"Requiring the banks to meet their caps on a daily basis would be consistent with the intent behind establishing the foreign-exchange derivatives regulation," Deputy Finance Minister Choi Jong-ku told Reuters.

South Korea already lowered the ceilings on banks' foreign currency derivatives positions in November, seeking to stem the flow of hot money into its markets.

The Korean won traded at a 15-month high early on Monday and is up nearly 7 percent against the dollar so far this year. It has appreciated roughly 15 percent against the yen so far this year, as well, putting more pressure on the country's struggling exporters.

Local policymakers have repeatedly voiced concerns about the currency's strength. Its appreciation has accelerated since September despite weak economic indicators, which officials said may be due to speculation.

Choi also said authorities may temporarily require banks to meet their caps based on a weekly average to ease the transition.

The currency reacted little to the news, as most investors had already been expecting additional steps against foreign inflows. But dealers said the ministry's comments, combined with fears of additional market interventions, will provide additional support for the dollar.

"The announcement appears to be strategically timed to coincide with the won rising above the 1,080 resistance level," Hyundai Futures analyst Lee Dae-ho said, adding that authorities may also be trying to coax importers to buy dollars by undercutting expectations for any sharp falls for the U.S. unit.

From Jan. 1, 2013, ceilings on currency derivative positions will be cut to 30 percent of equity for local banks from the current 40 percent while the cap for the foreign bank branches will be cut to 150 percent from 200 percent. The ministry is studying whether to cut these caps further, Choi said.

Based on current regulations, a bank that exceeds the derivatives cap will have its cap reduced based on how long the firm breached the cap and by how much.

Another finance ministry official said that while the government is studying various options, tighter rules on derivatives trading is likely to come first as it takes the least amount of time to implement.

The foreign-exchange authorities are also considering steps involving the non-deliverable forwards market and foreigners' bond investments in order to bolster existing capital flows management regulations, the official said, without providing specifics.

Authorities could also adjust existing levies on banks' offshore borrowings or also start subjecting brokerages to the same levies, Choi said, though adding that such steps would require additional discussions within the government.

(Additional reporting by Joyce Lee; Editing by Choonsik Yoo & Kim Coghill)

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