BIS calls on Asian economies to hedging

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BIS calls on Asian economies to hedging

The Bank for International Settlements said that Asia's emerging economies should improve their oversight of foreign exchange risk and make currency hedging more flexible as growing dollar investments make the region more vulnerable to currency swings.

In a quarterly report released Monday, the BIS said that a growing holding of dollar-denominated portfolios of institutional investors and asset managers in Asia's emerging economies has been led by a growing wealth and ageing populations.

In March 2020, the BIS held regular meetings for the world's central banks, when the outbreak of the epidemic led to a surge in dollar hedging demand.

Hyun Song Shin, economic adviser and head of research at BIS, said the demand for hedging is long-term, but the supply of hedging services is short-term.

If you can secure long-term hedging, you're in for a long-term hedging. There is a maturity mismatch between the supply of hedging services and demand for hedging services. During the Asian financial crisis in the late 1990s, emerging nations' problems centred around massive debt burdens that were worsened by capital outflows and sharply falling currencies.

The report said that in 2019 the trading in derivative contracts referencing the currencies of six Asian emerging economies - including South Korea, Malaysia and Thailand - has risen to nearly $9.4 billion, more than double 2013 levels.

It said that demand for short-term dollar funding has increased because of that, which can create new risks in times of financial stress.

The report said that financial authorities should look into foreign exchange funding risks that are created by non-bank investors, such as pension funds, insurers and asset managers.

The BIS called for Asian emerging economies to change foreign exchange hedging rules to offset demand for short-term dollars, such as during the start of the COVID-19 epidemic last year.

The report said that Economies could allow flexible hedging of currency risk and encourage longer-term foreign exchange hedging to address the needs of insurers and other institutions.