S. Korea mulls normalizing eased rules on banks' FX derivative positions

South Korea said Tuesday it plans to consider normalizing eased rules on banks' foreign exchange (FX) derivative positions as FX liquidity conditions have improved amid the global economic recovery.

In March 2020, the country relaxed rules on banks' FX forward positions after the country's FX and swap markets suffered a severe dollar crunch caused by market routs over the pandemic.

Last year, the country raised the cap on the holding of local banks' FX forward positions to 50 percent of their equity capital from the previous 40 percent. For local branches of foreign banks, the cap was lifted to 250 percent from 200 percent.

"Market volatility could increase amid global concerns about rising inflation and major economies' moves toward normalizing their accommodative monetary policy," Vice First Finance Minister Lee Eog-weon said after a pan-government meeting on FX soundness.

"In this sense, the government plans to consider normalizing some of its FX-related rules that were eased (during the pandemic-caused market routs), depending on economic situations and FX liquidity conditions," he added.

In 2010, the government adopted banks' FX derivative rules in a bid to curb excessive foreign borrowing and ease the Korean currency's sharp rise against the US dollar.

The government is closely monitoring the impact of the Federal Reserve's potential tapering of its bond purchases amid the accelerating recovery of the US economy.

South Korea's short-term foreign debt has sharply risen since the country relaxed banks' FX rules last year.

The country's short-term external debt, whose maturity is less than one year, reached $165.7 billion as of end-March, up $6.3 billion from three months earlier, according to central bank data.

Last year, the short-term foreign debt grew $23 billion on-year to $157.5 billion.

The Korean currency ended at 1,129.70 won per the greenback Tuesday, up 2.1 won from the previous session. (Yonhap)