Central banks loosen market restrictions

BANGKOK - Thai financial institutions are set to become more active players in the global foreign exchange derivatives market following the relaxation last week (August 5) of capital rules introduced to curb the baht.

The Bank of Thailand (BoT) said that, as of last Wednesday, institutions, including corporates, with net assets of more than 5 billion baht ($147 million) are permitted to invest up to $50 million in foreign assets, including FX derivatives and structured products. Under the now-defunct rules, initially introduced in 2006, overseas investments were limited to institutional investors, with corporates only able to use FX derivatives to hedge exposures (FX Week, December 2006).

"The bank has relaxed regulations to increase alternative channels of investment and risk management, and more flexible undertakings of foreign currency transactions," the BoT said.

The relaxation also allows individuals and smaller companies to trade derivatives, although only through securities companies. Baht-denominated FX derivatives trades with local banks can only take place if to hedge transactions over a period of less than a year - or to unwind derivatives transactions of less than $20,000. Local banks can now additionally offer a wider range of derivatives to include structured products linked to foreign exchange, foreign stock market indexes and foreign interest rates as long as the baht is excluded.

Meanwhile, Iceland's central bank also revealed on August 5 plans to reverse capital restrictions enforced last November to curb a depreciation of the króna (FX Week, December 8). Sedlabanki said the restrictions will be lifted in two phases, with the first to be implemented after November 1, focusing on liberalising FX inflows linked to new investments. The second will free up outflows, starting with assets with longer-term maturities, although the bank has not revealed commencement dates.

"Removal of controls is an important step towards normalising economic conditions," said Sedlabanki. "The use of Icelandic króna for international transactions will remain controlled until the final stage of the liberalisation."