With the won-dollar exchange rate soaring above 1,560 won intraday recently, authorities decided to launch a special joint foreign-exchange inspection of banks that handle FX operations, according to reports on the 8th. They aim to check whether there were speculative transactions that bet on a rise in the exchange rate.
The joint foreign-exchange inspection is based on Article 20 of the Foreign Exchange Transactions Act and Article 35 of its Enforcement Decree. Under these provisions, the Bank of Korea and the Financial Supervisory Service can jointly conduct inspections of institutions that handle foreign-exchange operations. The last time the two agencies launched a joint foreign-exchange inspection was in 2010, when the exchange rate plunged after the global financial crisis.
According to the foreign-exchange authorities that day, the Financial Supervisory Service and the Bank of Korea were said to be set to inspect banks that trade foreign exchange to see whether there were speculative transactions during the recent surge in the exchange rate. They are expected to scrutinize records of forward transactions conducted in the offshore non-deliverable forwards (NDF) market in particular. They will first carry out a paper-based inspection, and if statistical anomalies are found, they plan to begin on-site inspections.
The foreign-exchange authorities plan to strengthen monitoring of transactions conducted in the NDF. If speculative transactions persist, they intend to tighten the system so they can be briefed on who the counterparties are. They are also reviewing ways to provide incentives to the parties so that transactions conducted in the NDF can take place within the market.
Meanwhile, the foreign-exchange authorities plan to work with the National Tax Service and the Korea Customs Service to check whether exporters and importers settled payments and filed reports on time. Under the Foreign Exchange Transactions Act, if the timing of settling a payment exceeding $100,000 per contract differs by more than one year from the time the actual goods are exchanged, it must be reported to the Bank of Korea. Remitting or receiving payments without reporting is illegal.
Separately from the joint foreign-exchange inspection, government ministries were said to be preparing to jointly ask exporters to release dollar-denominated receipts into the market. When exporters put their dollars into the market, demand for won expands, putting downward pressure on the won-dollar exchange rate. Exporters tend to wait for the won-dollar exchange rate to rise before selling dollars to capture FX gains.
The foreign-exchange authorities were said to be communicating closely with the United States to conclude a "Korea-U.S. currency swap," cited as one of the measures to stabilize the won-dollar exchange rate.