SEOUL: South Korea's probe into foreign exchange derivatives positions at banks will focus on a recent sharp rise in short-term foreign debt and could result in tougher rules for lenders, two senior government officials said on Friday.
The finance ministry, the Bank of Korea and the regulatory Financial Supervisory Service are set to investigate FX derivatives transactions at banks from April 26 through May 6 as part of increased government efforts to control potentially destabilising inflows of speculative money.
"We are worried about a rise in short-term debt at some banks, thus we decided to launch a joint inspection," Finance Minister Yoon Jeung-hyun told reporters after delivering a breakfast speech to a forum.
Asked about a possible reduction in ceilings on derivatives deals, he said: "They are open to adjustment. We first need to check on the current situation."
The ceilings -- first announced in June last year and put into force in October -- are set at 250 percent of equity for foreign bank branches and 50 percent for domestic banks and subject to change every three months.
Banks' short-term foreign debt started to rise early this year, with analysts attributing the increase to heavy dollar selling in FX forward markets by shipbuilders with robust order books.
To hedge their positions, they need to buy dollars in the spot market from banks, pushing the lenders to borrow dollars to settle the deals.
Short-term external debt held by banks in South Korea fell to $101 billion at the end of 2010, the lowest level since 2006, according to Nomura.
Nomura estimated bank holdings of short-term external debt then rose to $110 billion in the first quarter of this year.
A senior official at the Financial Services Commission, an industry watchdog, said short-term debt growth might not be driven by shipbuilders but by offshore demand which could include speculative bets on the won's appreciation.
"We will look into the matter and judge whether additional measures are needed," the official said, declining to be identified due to the sensitivity of the issue.
"Rising shipbuilding orders do not seem like the answer to the rise in the recent forward (dollar/won) selling positions."
Asia's fourth-largest economy has stepped up moves to control rapid inflows of funds that threaten to fuel inflation and make its exports less competitive by pushing up the value of the won.
Authorities have allowed the currency to gain more than 5 percent against the US dollar so far this year in a bid to curb imported inflation, but are loathe letting the won rise too far, too fast.
Non-deliverable forwards (NDFs) are the main form of derivatives on which policymakers are keeping a close eye.
Since last year, South Korea has introduced two other sets of capital controls aimed at mitigating cross-border money flows, including the termination of a tax exemption on foreign holdings in government bonds. It is also set to start applying in August a levy on banks' non-deposit foreign-currency debts.
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