S. Korea Limits Foreign Exchange Derivative Contracts

South Korea’s financial authorities announced on Sunday measures to help stabilize the country’s currency and financial system and limit damage to the broader economy during times of financial volatility such as the 2008 global crisis.

South Korea has suffered when international capital flows suddenly reverse during periods of turmoil, such as the 1997-98 Asian economic crisis and the 2008 meltdown, when investors take out their money and flee to assets — often dollar-denominated — perceived as safer.

In both cases, South Korea saw capital rush out of the country. That caused the won to plunge and strongly crimped the ability of local banks and corporations with foreign currency loans to secure dollars to pay them back.

The announced measures, which include limits on how much capital can be used in foreign exchange derivatives trading for both domestic and foreign banks, are meant to “curb excessive volatility of capital flows,” the Ministry of Strategy and Finance, the Bank of Korea and the country’s financial regulators said.

“The past two financial crises highlighted the need for dealing with volatile capital flows,” the government said. “Excessive capital inflows during boom periods and sudden outflows in times of bust created a severe financial crisis.”

Foreign bank branches in South Korea will be limited to investing 250 percent of their previous month’s capital in foreign exchange derivatives contracts, down from the current approximately 300 percent. The limit for domestic banks will be 50 percent. The previous amount was not provided.

The new measures will be implemented from the middle of next month and be accompanied by a three-month grace period, authorities said.

The new measures also include reinforced rules on bank loans taken out in foreign currencies and strengthening the monitoring of capital flows.

South Korea, which is the chair this year of the powerful Group of 20 leading economies, has taken the lead on calling for the creation of financial safety nets to protect countries that are buffeted by international capital flows.

The South Korean won fell 25.7 percent in 2008 and then rose 8.2 percent last year amid extremely sharp swings within both years.

Foreign exchange instability is a a huge risk for banks and companies in South Korea, which is a major exporting and importing economy, when it comes to investment planning and asset allocation.

KELLY OLSEN, AP Business Writer SEOUL, South Korea