Brokerages, insurers face stricter monitoring over foreign exchange exposure

21-Jan-2021 Intellasia | KoreaTimes | 6:02 AM Print This Post

Korea plans to beef up the monitoring of foreign exchange liquidity conditions at non-banking financial firms, including brokerages and insurers, to prevent potential market turmoil caused by a dollar shortage, the Ministry of Finance and Economy said Wednesday.

Under the plan, non-banking financial firms will be required to submit a monthly plan on borrowing US dollars, including ways to counter a sudden spike in demand for the key reserve currency brought on by unforeseen risks.

Their foreign currency exposure will be calculated by net overseas assets divided by total overseas assets using a method the finance ministry created to measure the financial health of non-banking financial firms.

“The extreme volatility seen in the forex market last March was the highest seen since the global financial crisis of 2008. We sought to enhance regulatory measures in a broader, preemptive move to maintain financial health, a key factor in determining Korea’s credit rating,” said Kim Seong-wook, director general for the ministry’s international finance bureau.

Non-banking financial companies will also be required to submit a monthly report on the maturity dates of their dollar-denominated debt and assets, with both clearly specified by the amount of cash at hand and forward contracts.

The measures seek to identify the amount of 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.

They are among key measures announced by the Ministry of Economy and Finance, Financial Services Commission (FSC), Bank of Korea (BOK) and Financial Supervisory Service (FSS) to strengthen the financial soundness of non-banking financial institutions.

The firms will no longer be able to claim their assets as being liquid if dollar-denominated assets cannot be converted into cash immediately or in a short amount of time.

Brokerages will be required to hold at least 20 percent 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.

The slew of measures to reduce liquidity risks in the foreign exchange (FX) market ? especially involving non-banking firms ? followed extreme market volatility about a year ago, defined by a massive outflow of US dollars that caused the Korean won to plummet in value to 1,280 won against the American currency in March 19.

The sharp devaluation of the Korean currency came after many local brokerages failed to meet margin calls made by their overseas counterparts following a pandemic-triggered stock market crash around the world and the resulting nosedive in indices of exchange-linked securities (ELS) whose underlying assets included key global financial market indices.

Many local brokerages sold the ELS in question, and about six of them were asked to put up a combined 1 trillion won in a matter of days, a chief driver of the rapid mid-March weakening of the Korean won that stabilised only after a $60 billion currency swap was signed between Korea and the US, March 19.

Reflected in the measure is a sharp increase in foreign assets held by non-banking firms amid Korea’s growing current account surplus, as illustrated by those held by securities companies doubling every year for the past three years. The figure was $81.3 billion in 2018, up from $49.8 billion in 2017, a further jump from $16 billion in 2016. It remains at $92.8 billion as of 2019.

Insurers are also increasing long-term, high-return investments, yet their markedly small overseas debt on paper calls into question where they borrowed the money from.

“Insurers’ overseas assets stood at $146.3 billion in 2019, but their debt was only about $9.9 billion, meaning the difference was borrowed in the swap market. We sought to identify what remains unnoticeable in order to put them in a wider risk-management perspective,” Kim said.

“Insurers’ overseas assets stood at $146.3 billion in 2019, but their debt was only about $9.9 billion, meaning the difference was borrowed in the swap market. We sought to identify what remains unnoticeable in order to put them in a wider risk-management perspective,” Kim said.

https://www.koreatimes.co.kr/www/biz/2021/01/367_302793.html

 

Category: Korea

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