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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World S.Korea flags tighter fx rules for foreign banks Reuters - Tuesday, June 22 Send IM Story Print * S.Korea to cut fx derivatives cap for foreign bank branches * Details such as timing not decided yet * Bond futures turn lower on foreign selling * Won cuts losses on yuan but under pressure By Lee Shin-hyung and Yoo Choonsik SEOUL, June 22 - South Korea on Tuesday flagged a plan to tweak currency trading rules unveiled just over a week ago and tighten limits imposed on foreign banks, unsettling currency and bond markets with a sudden policy flip-flop. A senior finance ministry official said that the government planned to eventually bring the limits in line with lower caps set for domestic banks, though it had not been decided when. On June 13, the authorities announced a new set of rules guiding banks' currency derivatives' trading, saying they aimed to prevent volatile capital swings that have repeatedly plagued South Korea at times of market turbulence. The rules, expected to come into force in October, set a ceiling of 50 percent of equity capital for currency derivatives positions of domestic banks and a 250 percent ceiling for foreign bank branches to account for their typically much lower capital. On average, equity capital of foreign bank branches represents just 1/30 of that of domestic banks and market analysts had said that setting the same limits on local and foreign banks would effectively shut out the latter from the currency forwards market where they are the dominant players. "The government's basic stance is that we should not discriminate against domestic banks in relation to foreign bank branches," Kim Ik-joo, head of the finance ministry's international finance bureau, told Reuters. Another senior official, who asked not to be named because he was not directly responsible for the issue, said any such adjustment would be implemented over the medium-to-long term. BENDING THE RULES? Traders and bankers reacted to the news with disbelief and disappointment, with some suggesting that the ministry was merely venting its frustration after media reports that banks were finding ways around the new rules. "The authorities do not like to see media reports that they are increasing positions and using dual books," said Jeong My-young, a currency strategist at Samsung Futures. Treasury bond futures <0#KTB:> turned lower after modest gains amid foreign selling and the won <KRW=> <KRW=KFTC> came under pressure as additional steps could dampen fund inflows, although later cut losses after China set the yuan's <CNY=CFXS> daily mid-point higher. [ID:nSGE6590DA] South Korean media reported that branches of foreign banks were boosting their currency forwards before the new limits kick in and some were shifting reporting of their trades to overseas branches, though financial regulators have said they have not spotted such movement yet. "The government is taking a wrong approach. They appear to have been in hurry when they announced the rules," said a head of a foreign bank branch in Seoul. "If the caps are curtailed, it will send markets into a panic. It is obvious that funding conditions at foreign bank branches are different from local banks," the banker said, adding that in such a case, foreign banks would be forced to move their swaps and arbitrage trade out of South Korea. The rules adopted this month aim to mitigate the effects of a persistent imbalance in the currency market between heavy supply of dollars from shipbuilders and other big exporters and their demand for hedging and subdued demand from importers. The imbalance drives down the cost of borrowing dollars, encouraging big capital inflows in the form of short-term debt that can be quickly reversed at times of financial stress, as it happened after the collapse of Lehman Brothers in September 2008. Some traders saw Kim's remarks as a warning to those trying to beat the system and doubted the authorities would push through tougher caps on foreign banks any time soon given that they were doing the bulk of forwards business with big Korean exporters. "In short, the government is ordering someone without enough dollars to deal with exporters, banning someone with enough dollars from the deals," one currency trader said. (Additional reporting Chen Jong-woo and Kim Yeon-hee; Writing by Tomasz Janowski; Editing by Tomasz Janowski) Recommend Send IM Story Print Related Articles EU threat to Sri Lanka trade over human rights AFP - 9 minutes ago Shoppers Stop QIP announcement likely in 60 days Reuters - 20 minutes ago BRIEF-Isiklar Holding plans IPO next year Reuters - 20 minutes ago Russia Gazprom says further cuts possible if no solution Reuters - 21 minutes ago Kazakh bank Halyk repays $408 mln in govt support Reuters - 22 minutes ago News Search Top Stories Gazprom cuts Belarus gas supply by 30 percent Early menopause doubles risk of heart problems: study Oil firms challenge US drilling freeze UK braces for the axe to fall in emergency budget US Supreme Court overturns ban on GM crop More Top Stories » ADVERTISEMENT Most Popular Most Viewed France's richest woman moves to defuse scandal Volvo recalls nearly 30,000 cars Egypt oil spill threatens Red Sea marine life Host Canada presents itself as financial model for G20 World stocks soar after Chinese move on yuan More Most Viewed » More Most Recommended » Elsewhere on Yahoo! 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