S Korea tightens derivatives limits South Korea has tightened limits on banks' exposure to currency derivatives in an attempt to stem volatility in the rapidly appreciating won. The finance ministry on Tuesday said domestic banks would be allowed to hold foreign exchange derivative positions up to a maximum of 30 per cent of their equity from January 1, down from the current level of 40 per cent. The limit for foreign bank subsidiaries will be reduced from 200 per cent to 150 per cent. Following the announcement, the won rose 0.14 per cent to Won1084.4 against the US dollar. The South Korean currency had weakened last weak after Choi Jung-gu, deputy finance minister, indicated that such measures were likely. We expect capital flows to expand in the future, given the country's relatively strong economic fundamentals and abundant global liquidity. We need to act preemptively on this possibility," the finance ministry said on Monday. The move is the first regulatory intervention aimed at curtailing excessive currency volatility since August 2011. The won fell sharply following the 2008 global financial crisis, reaching a trough of more than Won1,500 to the dollar the following year. But it has since risen strongly because of current account surpluses and net capital inflows to South Korea. "What concerns us is the volatility," Mr Choi told the Financial Times last week. The won has strengthened by 9.3 per cent against the dollar over the past six months despite efforts by the authorities to check its rise. Previous measures have included direct intervention in the currency market and the reintroduction of a withholding tax on foreigners' bond holdings. Lee Jung-gu, a director at the Financial Supervisory Service, South Korea's financial regulator, said the new restrictions on currency derivatives would not cause severe disruption in the banking sector. "A handful of banks have forex forward positions above the new ceiling but most banks are managing their positions within the limit," Mr Lee said. The FSS and the Bank of Korea are currently conducting an investigation into whether some banks may have breached the existing limits. Kookmin Bank, the country's largest lender, was already "way below" the new ceiling, said Ha Jung, a manager in the bank's trading department. "We have enough foreign currency liquidity at the moment so no big impact from the new regulations is expected," he said. But it could reduce arbitrage trading using foreign currency derivatives in the long run.