The Financial Supervisory Service and the Bank of Korea have wrapped up a joint inspection of banks' foreign exchange since early this month. The Financial Supervisory Service is said to have begun reviewing whether to impose sanctions based on the inspection results. The Financial Supervisory Service is reported to have focused on whether there was any exchange rate disruption caused by speculative offshore non-deliverable forward (NDF) transaction.
According to the financial authorities on the 25th, the Financial Supervisory Service has completed the bank foreign exchange inspection conducted with the Bank of Korea since the 7th and is reviewing the results. Whether to conduct additional inspections has not been decided, and if violations are found, it is expected to proceed with sanction procedures.
The inspection was carried out mainly on foreign banks to check whether there were acts aimed at obtaining unfair gains or giving unfair gains to a third party by moving or fixing foreign exchange rates. Targets for verification include one-way transaction executed at a specific time in a size larger than customers' orders with the intent to move prices.
The Financial Supervisory Service is known to have mainly examined matters related to NDF transaction carried out at banks. An NDF is a derivative that, without actual won transaction, settles only in dollars the difference between the agreed exchange rate at a future point and the actual rate at maturity. Investors can take positions on whether the exchange rate will rise or fall without directly holding won. The Bank of Korea believes that such transaction can amplify exchange rate volatility. NDF transaction are not subject to foreign exchange authorities' regulations, allowing them to avoid measures intended to reduce exchange rate volatility.
On the 8th, when the inspection began, the won-dollar rate on the Seoul foreign exchange market opened at 1,555.2 won per U.S. dollar, the highest since Mar. 6, 2009 (1,590 won) during the global financial crisis. It later closed at 1,535 won after verbal intervention by the foreign exchange authorities. A Financial Supervisory Service official said, "We have completed the bank foreign exchange inspection and will review whether to impose sanctions in accordance with procedure."