Asia's financial regulators bolster FX barriers
Several Asian regulators have come down hard on foreign exchange derivatives over concerns the markets are prone to abuse, with corporates willing to speculate and banks not being responsible enough in providing the best advice. Market opportunities still exist but lessons from the past must be learnt to stem the clampdown
On December 28 the Reserve Bank of India (RBI) issued final guidelines concerning over-the-counter foreign exchange (FX) derivatives, effective immediately.
The message from these new rules is clear: the central bank will not tolerate corporates irresponsibly speculating on currency and will not allow banks to court them with a vast array of derivatives products.
If the RBI’s diktat had come out before the financial crisis, the banks would have been in uproar at how draconian it was. As it stands, the sell-side was mute on the subject.
India’s central bank is not the first regulatory body to make such a move in Asia. South Korea introduced similar measures last year after several companies collapsed as a result of using supposed FX hedging tools to speculate on future currency movements.
Countries such as Taiwan have also battened down the hatches in various ways, and China has introduced new derivatives regulations making it clear that derivatives that may incur unlimited loss are out of the question.
The decision of regional regulators to roll out more red tape is understandable given the severity of the global financial crisis, subsequent FX volatility, and the need to protect Asia’s economies – sometimes even from themselves (think Chinese state conglomerate Citic’s painful US$1.9