Emerging Asia Needs Dollar Hedging Reforms To Reduce Market Risks, BIS Says

A general view of the skyline from Makati City Hall in Manila, Philippines on May 11, 2010. To match CYBER-HEIST / FEDERAL REUTERS / Nicky Loh Special Report

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TOKYO, Dec.6 (Reuters) – Emerging Asian economies are expected to improve oversight of currency liquidity risks and make currency hedging more flexible, as growth in dollar investments makes the region more vulnerable to currency fluctuations, said the Bank for International Settlements.

Rising wealth and an aging population have led to an increase in dollar-denominated portfolios of institutional investors and asset managers in emerging Asian economies, the BIS said in a quarterly report released on Monday. .

Vulnerabilities in Asia were seen in March 2020 when the onset of the pandemic led to increased demand for dollar hedging, creating further strains for financial markets, said the BIS, which holds regular meetings for banks. powerhouses of the world.

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“You have this juxtaposition that the demand for coverage is long term, but the supply of coverage services is short term,” said Hyun Song Shin, economic advisor and research manager at BIS.

“Unless you can guarantee long-term coverage … there’s always that maturity mismatch between that offering for coverage services and the demand for coverage.”

The issue has raised new challenges for emerging Asian economies. During the Asian financial crisis of the late 1990s, emerging market problems focused on the massive debt burden compounded by capital outflows and the sharp fall in currencies.

Exchanges of derivative contracts referencing currencies of one of Asia’s six emerging economies – including South Korea, Malaysia and Thailand – against the US dollar reached nearly $ 9.4 billion in 2019, or more double the levels of 2013, according to the report.

This has resulted in increased demand for hedging services, which can create new risks during times of financial stress, when the demand for short-term dollar funding increases, he said.

Financial authorities should aim to increase oversight of foreign currency financing liquidity risks created by non-bank investors, such as pension funds, insurers and asset managers, according to the report.

The BIS has called on emerging Asian economies to change currency hedging rules to offset demand for dollars in the short term, as when the COVID-19 pandemic started last year.

Savings could do this by allowing flexible hedging of currency risk and encouraging longer-term currency hedging to meet those needs among insurers and other institutions, the report said.

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Reporting by Daniel Leussink; Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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