Authorities to improve offshore NDF transparency, study domestic absorption

Probe launched into lead-and-lag illegal foreign exchange transactions

'Stern action' pledged against market-disrupting behavior riding won weakness

South Korea's top economic and financial authorities said Sunday that excessive exchange rate volatility and one-directional currency moves are harmful to the economy, and pledged to step up scrutiny of speculative trading and market-disrupting activity.

Deputy Prime Minister and Finance and Economy Minister Koo Yun-cheol convened an emergency market situation review meeting — known as the F4 — at the Korea Federation of Banks headquarters in Seoul, bringing together the Bank of Korea, the Financial Services Commission and the Financial Supervisory Service to discuss recent trends in financial and foreign exchange markets and map out a response. Bank of Korea Governor Shin Hyun-song, FSC Chairman Lee Eok-won and FSS Director General Lee Chan-jin attended the meeting.

Deputy Prime Minister and Minister of Finance and Economy Koo Yun-cheol chairs a market situation review meeting at the Korea Federation of Banks in Jung-gu, Seoul, on Sunday. [Ministry of Finance and Economy]
Deputy Prime Minister and Minister of Finance and Economy Koo Yun-cheol chairs a market situation review meeting at the Korea Federation of Banks in Jung-gu, Seoul, on Sunday. [Ministry of Finance and Economy]

The won-dollar exchange rate surged to an intraday high of 1,561.5 won during overnight trading that closed early Saturday — its highest level in 17 years and three months, since March 2009 during the global financial crisis.

Meeting participants assessed that the recent rise in the won-dollar rate reflects external factors, including heightened tensions in the Middle East and expectations of further US interest rate increases.

They also agreed that supply-and-demand factors — including foreign investors rebalancing their portfolios and taking profits amid a strong domestic stock market — combined with some speculative trading to accelerate the one-directional move in the exchange rate.

Participants said the heightened exchange rate volatility seen recently is not desirable for the Korean economy, and made clear they would not tolerate excessive volatility or one-directional moves.

Authorities said they are particularly concerned that herding behavior in offshore non-deliverable forward derivative trading is affecting the domestic foreign exchange market, and pledged to analyze the phenomenon closely and improve transparency in NDF transactions. They also plan to develop measures to absorb offshore NDF trading into the domestic foreign exchange market.

Scrutiny of speculative moves and suspected market-disrupting activity riding the won's weakness will also be intensified. The Bank of Korea and the Financial Supervisory Service will examine related transactions and take stern action if any violations are confirmed.

Authorities said they will also investigate illegal foreign exchange transactions involving so-called lead-and-lag practices — where importers accelerate payments and exporters excessively delay receipt of proceeds during periods of won weakness. The government plans to strengthen monitoring of such transactions through its illegal foreign exchange response task force.

"Market volatility could widen again depending on how the Middle East war unfolds and on US inflation trends," Koo said. "We will monitor market conditions around the clock with a heightened sense of alert and work with relevant agencies to swiftly implement the measures drawn up today."

Participants assessed that South Korea's economic fundamentals and external credibility remain solid, pointing to continuously upward-revised profit outlooks for the semiconductor sector and related industries, as well as an expanding current account surplus. They also noted that as the domestic stock market grows on the back of competitiveness in key industries such as semiconductors, the ripple effects are spreading beyond the foreign exchange market to fiscal policy, the real economy and the broader macroeconomic and financial landscape.

In response, authorities said they will strengthen risk management frameworks to improve macroprudential soundness while also accelerating efforts to pursue an ultra-innovation economy and advance structural reform.


y2k@heraldcorp.com