South Korea Eases FX Derivatives Rules to Combat USD Shortage

As COVID-19 continues to rattle the foreign exchange (forex) markets, the Bank of Korea (BOK) and the South Korean Finance Ministry announced in a joint statement this Wednesday that it will loosen its FX rules in order to encourage banks to supply more dollars in local markets.

According to an article from Reuters, the COVID-19 pandemic is causing a global rush for the United States dollar (USD), causing a liquidity crisis. Because of this, the cap on foreign currency forward positions that local banks are allowed to hold will be increased to 50 percent of their equity capital from the 19th of March, 2020.

Currently, banks are allowed to hold 40 percent. For foreign banks, the cap has also been raised from 200 percent up to 250 percent.

According to the news outlet, the South Korean Finance Ministry said that by raising the ceiling, it is expected to help address the mismatches in dollar liquidity in the country’s derivatives markets, as traders increasingly flock to the USD, which is seen as a safe haven currency amid the deepening economic impact of the coronavirus pandemic.

Today, the South Korea finance minister Hong Nam-ki said in the statement that the government is planning to launch a more “comprehensive financial support” package, in addition to the measures announced today, in order to support companies that are being affected by the virus, the report from Reuters said.

Hong Nam-ki said that the ministry is ready to deploy a fund to stabilize bond market volatility, if the need arises, in order to calm investor sentiment and deter panic in the currency market spreading to other financial markets.

Regulators and central banks respond to COVID-19

The BOK isn’t alone in its attempts to provide support to the financial markets amid the current COVID-19 crisis, with a number of regulators, such as the Australian Securities and Investments Commission (ASIC), the Commodity Futures Trading Commission (CFTC) implementing measures to help weather the storm.

Central banks are also taking steps to keep the markets afloat. Namely, the United States Federal Reserve declared on Sunday that it would be cutting interest rates to zero for the first time since the 2008 financial crisis.

As FortuneZ reported, the move effectively cuts interest rates by 100 basis points following the Fed’s sudden decision to cut rates by 50 basis points less than two weeks ago. However, the Fed is not considering negative interest rates.

(Photo: flickr)

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