South Korea’s financial authorities said Wednesday they plan to adopt stricter guidelines, regulations and monitoring for foreign exchange trading by local non-banking institutions such as brokerages and insurers.

“Three types of new monitoring standards will be adopted to keep an eye on forex liquidity in non-banking financial institutions,” Deputy Prime Minister and Finance Minister Hong Nam-ki said in a press briefing.

“We will improve the effectiveness of the monitoring of such activities in the non-banking financial sector, which had remained a blind spot. Financial firms will also roll out their own self risk management standards, allowing them to strengthen their forex risk management and subjects of our stress test will be expanded,” he added.

The new monitoring yardsticks will each measure the firms’ purchase and supply of forex in a monthly cycle, the gap between the forex assets and debts in each firm and maturity dates of forex trading and management, according to the Ministry of Economy and Finance, the Financial Services Commission and the Bank of Korea.

The aim of this is to bolster security of brokerages in the FX swap market, in which two foreign parties exchange, and swap principal and interest payments on a loan made in one currency for a loan of equal value in another currency.

Brokerages often turn to the market, instead of purchasing foreign currency directly, which puts them at a relatively higher risk compared with commercial banks.

On top of it, stress tests will be carried out every quarter, to check on the firms’ liabilities and weaknesses. A separate test on forex management soundness would be carried out monthly, compared with the previous quarterly cycle.

Rules and monitoring tied to forex liquidity coverage ratio will be overhauled and improved as well, the authorities vowed.

The announcement comes as the government has been expressing concerns of the snowballing forex debt in the non-banking financial sector.

The new rules are expected to help reduce risks tied to the trade of forex derivatives as well. The watchdog Financial Supervisory Service would participate in the monitoring of the forex trade in the firms.

Also, local banks would be able to extend forex loans to non-banking institutions for cases that meet certain requirements.

By Jung Min-kyung (mkjung@heraldcorp.com)