MOF Tightens FX Regulation

South Korea plans to beef up the monitoring of FX liquidity conditions at non-banking financial firms to prevent potential market turmoil caused by a USD shortage.

• Under the plan from the MOF, non-banking financial firms will be required to submit a monthly plan on borrowing US dollars, including ways to counter spike in demand engendered by unforeseen risks. Foreign currency exposure will be calculated by net overseas assets divided by total overseas assets.
• Non-banking financial companies will also be required to submit a monthly report on the maturity dates of their USD-denominated debt and assets, and clearly specify the amount of cash at hand and forward contracts.
• The measures seek to identify the amount of US dollars borrowed over the short term in the swap market, a figure that is not stated on balance sheets and is therefore considered as a major risk in the event of a liquidity shock.
• The firms will no longer be able to claim their assets as being liquid if USD-denominated assets cannot be converted into cash quickly. Brokerages will be required to hold at least 20% of hedged sales of derivative-linked securities as liquid overseas assets, while insurers will be required to opt for long-term swap transactions over short-term ones.