The Financial Supervisory Service Issues Non-Action Opinion Letters to Support Foreign Currency Procurement by Financial Companies

[Asia Economy Reporter Song Hwajeong] The Financial Supervisory Service (FSS) announced on the 28th that it has issued a non-action letter to allow domestic financial companies to additionally secure foreign currency liquidity by utilizing foreign currency securities lending transactions, such as overseas government bonds held by them.

Although the foreign currency liquidity situation in the domestic financial sector is relatively stable, ongoing domestic and international uncertainties, such as the possibility of continued rapid interest rate hikes by the U.S. Federal Reserve (Fed), make it a situation that cannot be taken lightly.

Accordingly, the FSS decided to issue a non-action letter to support domestic banks in more easily procuring foreign currency overseas by utilizing foreign currency securities held by domestic financial companies such as insurance companies.

A non-action letter is a document in which the FSS Commissioner confirms that no sanctions or other measures will be taken in the future based on relevant laws and regulations regarding transactions to be conducted by financial companies, etc. The target transaction of this non-action letter is a transaction in which domestic banks borrow foreign currency securities from domestic insurance companies and then procure foreign currency funds by selling repurchase agreements (RPs) secured by these securities in overseas markets, thereby supplying foreign currency liquidity domestically. This non-action letter states that even if a timing difference occurs at the actual settlement time due to time zone differences between countries when the delivery of securities and the settlement instruction for collateral provision occur simultaneously, it is considered to have fulfilled the 'simultaneous performance obligation' stipulated in the relevant regulations and thus is not subject to post-action by the FSS.

The FSS estimated that the scale of U.S. government bonds and international organization bonds held by major domestic financial companies is about $31.2 billion (including $15.6 billion held by banks, as of the end of June this year). If foreign currency securities lending transactions between domestic banks and insurance companies become active, the inflow of offshore foreign currency liquidity into the domestic market is expected to increase. It also foresees that this could reduce the burden on the Bank of Korea in managing foreign exchange reserves during crises and contribute to strengthening the foreign currency response capacity across the domestic financial market and financial companies.

An FSS official said, "We plan to actively support related procedures so that foreign currency securities lending transactions between domestic banks and insurance companies can function as a crisis response channel for domestic foreign currency inflows."

According to the FSS, the foreign currency liquidity coverage ratio of domestic banks was 124.4% (provisional) this month, exceeding the regulatory ratio (80%) by more than 40 percentage points, and the rollover rates were also above 100%, with short-term at 150.2% and medium-to-long-term at 134.7%.

This content was produced with the assistance of AI translation services.