Bank of Korea, Financial Supervisory Service conduct joint foreign exchange inspection; speculative trades and one-sided market moves under scrutiny; banks warned of 'strict measures' if violations found
South Korean foreign exchange authorities are launching a joint inspection targeting non-deliverable forward (NDF) trades as the won-dollar exchange rate continues to surge amid external pressures — including uncertainty over US interest rate hikes and the outlook for an end to the US-Iran conflict. The move aims to tighten surveillance of bets against the won and market-disrupting activity. Authorities also said they would review measures to improve transparency in NDF trading and draw offshore transactions back into the domestic market.
The Bank of Korea and the Financial Supervisory Service announced Wednesday they would conduct a joint foreign exchange inspection of major foreign exchange banks. The inspection follows an emergency market review meeting held Sunday and will combine document-based and on-site examinations.
The inspection will focus on whether foreign exchange banks engaged in conduct that undermines foreign exchange market stability — including manipulating or fixing exchange rates to generate improper gains for themselves or third parties.
Conduct under scrutiny includes trades intended to disrupt market function or interfere with price discovery, as well as one-sided transactions executed at specific times in volumes exceeding customer orders with the intent of moving prices against those customers. These are among the representative examples of market manipulation defined under Article 4 of the Seoul Foreign Exchange Market Code of Conduct.
Authorities have zeroed in on NDF trades because they believe a significant portion of the won's recent weakness has been driven by the offshore market.
The won-dollar rate has repeatedly made large moves during overnight sessions in London and New York, fueling market speculation that won-bearish bets through NDF instruments may have amplified one-sided directional moves and broader volatility.
NDFs are derivatives that settle only the difference in exchange rates in dollars, without any actual exchange of won. They have long drawn criticism for allowing large positions to be built with minimal margin, which can amplify exchange rate volatility.
The Bank of Korea and the FSS said they would take strict action under applicable laws if violations are confirmed. Under the current Foreign Exchange Transactions Act, manipulating or fixing exchange rates for improper gain carries a penalty of up to five years in prison or a fine of up to 500 million won (about $329,000).
The government is also closely monitoring NDF trading trends and reviewing ways to redirect such transactions into the domestic foreign exchange market. The aim is to reduce reliance on the relatively opaque offshore market and expand domestic market-centered trading to ease exchange rate volatility.
Ahn Do-geol, a Democratic Party of Korea lawmaker and floor leader of the party's special committee on economic responses to the Middle East war, told reporters after the committee's sixth plenary session Wednesday that the government had agreed to develop measures to improve transparency in NDF market trading and gradually absorb it into the domestic foreign exchange market. He added that authorities would also actively review improvements to foreign exchange regulations — including easing foreign currency liquidity stress test standards and extending exemptions from the macroprudential levy — to expand private financial institutions' capacity to raise dollar funding overseas.
He also said the national pension fund is the single largest player in the domestic foreign exchange market, and that the government would accelerate institutional reforms to diversify the fund's overseas investment financing — through measures such as issuing overseas bonds, securing foreign borrowings and expanding foreign exchange swap arrangements — to spread out the concentration of dollar demand in the domestic market.
The government and financial authorities have been issuing daily market stabilization messages as the won-dollar rate has surged in recent days. On Sunday, the heads of four major institutions held an unscheduled emergency market review meeting and pledged a firm response to speculative trades and market-disrupting activity. The Financial Services Commission followed up Monday by summoning representatives from commercial banks and foreign bank branches to urge stronger internal controls against market manipulation.
y2k@heraldcorp.com
