UPDATE 2-Peru plans tighter control over currency forwards

* New rule still in hearing period
* Traders say rule might be avoided offshore
* BCP CEO suggests revision to rule
* Finance minister says central bank has lead
(Adds quotes, details)

By Patricia Velez and Teresa Cespedes

LIMA, Oct 21 (BestGrowthStock) – Peru may implement a new rule to
limit the ability of banks to make big bets in the market for
currency forwards, though traders said it was unlikely to
greatly affect the exchange rate.

Jorge Mogrovejo, a risk specialist at the country’s
banking regulator, the SBS, said on Thursday the new rule aims
to prevent volatility in the local currency.

Peru’s sol (PEN=PE: ) has climbed to a two-year high this
year as the U.S. dollar slumps globally, prompting
representatives of emerging markets to demand greater policy
coordination at the Group of 20 finance ministers’ meeting in
South Korea this week.

Because Peru’s sol is not fully convertible, some of the
pressure on it has come from derivatives, especially the
growing market for non-deliverable forwards, or NDFs.

Under the new rule in Peru, which is still in a hearing
period, banks’ positions in short-term derivatives would be
limited to 25 percent of their assets as defined by regulators
or 500 million soles ($179 million). The rule would apply to
derivatives contracts shorter than 90 days.

The SBS has asked banks to comment on the proposal by
mid-November.

Walter Bayly, the chief executive of Banco de Credito del
Peru (BCP), the country’s largest bank, said the ruling should
target non-resident investors.

“If the ultimate goal is to avert a sharp revaluation (of
the local currency) … the limit should be applied to trades
with non-residents,” he told Reuters.

He said most currency volatility is generated by trades
between local banks and foreigners, not by trades between two
local counterparties that tend to cancel each other out.

CENTRAL BANK MEASURES

Still, Bayly said hot money inflows were a concern and
that Peru’s central bank has done a good job of absorbing
them.

“We are all worried about this huge inflow of dollars
causing a quick revaluation of our currency,” Bayly said.
“It’s a problem that our neighboring countries are suffering,
too, and our central bank has successfully minimized it.”

One trader said the rule appeared to be too strict.

“The SBS is reducing the playing field with its proposal,
which is a little strict. Maybe it could be 30 percent or 35
percent,” one trader said.

Other traders said the ruling, if implemented, could
potentially be dodged by banks that have offices in New York,
where many NDF trades are placed.

A ruling handed down in January, which slapped a 30
percent tax on profits from short-term forwards, was blamed by
several local traders for shifting NDF trading volumes to New
York and away from Lima.

Even as the SBS eyes the new rule, Finance Minister
Ismael Benavides told Reuters that Peru’s central bank will
continue to take the lead dealing with speculative capital
inflows.

“It’s the central bank and continues to be the central
bank,” he said.

So far this year, the central bank has taken several
measures to discourage inflows of hot money as the dollar
slips globally.

It has raised deposit requirements on bank accounts
denominated in dollars or linked to foreign credit lines and
allowed local pension funds to invest in more assets
overseas.

The central bank has also intervened in the local currency
market during periods of excessive liquidity, buying billions
of dollars. The finance ministry has made purchases as well,
but relatively little compared with the $8.9 billion bought by
the central bank.
(Reporting by Patricia Velez and Teresa Cespedes; Editing by
Jan Paschal)

UPDATE 2-Peru plans tighter control over currency forwards