(Reuters) – South Korea on Sunday announced long-anticipated curbs on banks’ currency trades, saying it aimed to rein in short-term foreign debt and volatile capital flows that posed a risk to the world’s ninth-biggest exporter.

South Korea

The new steps will cover all currency derivatives trades, including non-deliverable forwards (NDFs), cross-currency swaps and forwards.

Following are new measures announced jointly by the Ministry of Strategy and Finance, the Financial Services Commission, the Financial Supervisory Service and the Bank of Korea:

FX DERIVATIVES POSITIONS AT BANKS

- Foreign bank branches will not be allowed to hold foreign-exchange derivative contracts in excess of 250 percent of their equity capital in the previous month.

- The limit for domestic banks and other financial companies was set at 50 percent of their equity capital.

- The measures will be finalized next month and come into force three months later, so most likely in October.

- Financial institutions will have up to two years to comply with the new requirements. The actual grace period will depend on individual requests and discussions with regulators.

- Foreign-exchange derivatives contracts held by foreign bank branches amounted to 301.2 percent of their equity capital at the end of April and those held by domestic banks stood at 15.6 percent.

- Authorities will review the curbs every quarter and may adjust the ceilings.

LIMITS FOR COMPANIES

- The ceiling on foreign exchange forwards, swaps and other derivatives of domestic non-financial companies will be reduced to 100 percent of their physical trade from a 125 percent cap introduced in November 2009.

CURRENCY LENDING BY BANKS TO DOMESTIC NON-FINANCIALS

- Banks’ lending to domestic non-financial companies in foreign currency will be limited to companies that need foreign exchange to pay for overseas transactions. The restriction aims at limiting borrowing to finance speculative financial trades.

- Small and medium-sized manufacturing companies will be allowed to roll over their existing borrowings.

- The new measure will come into force in July

FX LIQUIDITY RATIOS

- Domestic banks have to own long-term foreign-currency assets sufficient to fully cover their long-term foreign liabilities. This requirement has been tightened from a 90 percent requirement introduced in November 2009.

- Foreign bank branches are not subject to the required ratio but will be recommended to set their own standards to the similar effect.

- Foreign bank branches will be totally exempt from liquidity management obligations if their head offices submit guarantees to provide sufficient liquidity in emergency.

(Reporting by Kim Yeon-hee and Cheon Jong-woo; Editing by Yoo Choonsik and Tomasz Janowski)