The Ministry of Economy and Finance, Financial Services Commission, the latter's executive arm Financial Supervisory Service and Bank of Korea on Dec. 18 announced a joint plan to flexibly adjust the system for foreign exchange soundness. (Yonhap News)
By Park Hye Ri
The worsening KRW-USD exchange rate has prompted the easing of regulations on foreign currency soundness to stabilize supply and demand for foreign currency.
The Ministry of Economy and Finance, Financial Services Commission, the latter's executive arm Financial Supervisory Service and Bank of Korea on Dec. 18 announced this in their joint plan to flexibly adjust the system for foreign exchange soundness.
The first task is to reduce the burden on financial institutions of managing foreign exchange liquidity by temporarily suspending government supervisory measures until June 30. Such institutions have often stored more USD than needed because of their fear of sanctions if they fail a stress test for foreign currency liquidity, a gauge of response capacity for a crisis of foreign currency funds.
The forward exchange position system, which manages the inflow and outflow of foreign currency at the proper levels through foreign exchange banks, will also undergo rational adjustment. This mechanism was adopted in 2010 to prevent excessive inflow of foreign currency and more foreign loans at such banks.
The plan concluded that the system failed to reflect the real business structure of a foreign bank's domestic subsidiaries and hampered foreign currency inflows. Thus the forward exchange position ratio regulation was greatly relaxed from 75% to 200% for such affiliates.
Foreign investors will also get higher accessibility to invest in domestic stocks. A foreign integrated account will allow them to directly trade Korean shares at brokerages in the country without the need to open separate bank accounts.
Restrictions on who can open integrated accounts were scrapped on Dec. 17, thus allowing small and medium securities companies abroad to operate them. This reflects consistent demand for such accounts from domestic financial institutions.
Investors will also be fully informed that foreign companies listed on overseas stock markets are considered professional investors, a move designed to alleviate the problem of additional documentation requirements when trading foreign exchange derivatives with financial institutions.
Follow-up measures for the flexible adjustment plan will be quickly completed by the end of the month.
These measures are expected to attract more funds to the foreign currency market and resolve the structural imbalance between supply and demand. They will also help provide sufficient liquidity to the market as demand for foreign exchange hedging is seen to rise due to plans to improve supply and demand for foreign currency.
hrhr@korea.kr