South Korea will toughen limits on the amount of currency derivatives banks can hold as it is looking to reduce fluctuations in capital flows and the won, Bloomberg reports. The government will let local branches of overseas banks hold currency derivatives contracts equivalent to no more than 200% of equity capital, down from 250%. The government will also reduce the cap from 50% to 40%.
The rules will apply from July 1, 2011. The move comes after financial regulators and officials from the finance ministry and Bank of Korea inspected the practice of banks’ currency forward trading. The government may also impose a levy on non-deposit foreign-currency liabilities, held by domestic and foreign banks, beginning Aug. 1, 2011, with short-term debt facing higher charges.
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