The South Korean government has adjusted the forward exchange position limit of local banks from 40 percent to 50 percent and that of foreign bank branches in South Korea from 200 percent to 250 percent.
The measure is intended to ensure that companies and financial institutions can carry out foreign currency financing without difficulty and to stabilize demand and supply conditions in the swap market.
The equity capital-related upper limit was adopted in October 2010 for the purpose of suppressing a sudden capital inflow and short-term borrowing. Since then, the upper limit has been flexibly adjusted in accordance with market conditions and so on.
At present, with COVID-19 spreading across the world, the volatility of the foreign currency swap market of South Korea is poised to soar due to temporary lopsidedness attributable to demand related to foreign investors’ stock investment funds and the like.
The South Korean government is expecting that the adjustment will lead to more foreign currency fund supply capabilities on the part of banks and more foreign currency fund supply in the market.