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Philippine bankers to cut forex trading position


October 31, 200

Philippine bankers to cut forex trading position
Philippine banks will cut by half their foreign exchange purchases from the market to ease pressures on a weak peso in one of three measures agreed by a big industry group, Reuters quoted sources from the group as saying Thursday.

Banks would also tighten scrutiny of offshore investments of clients to prevent arbitrage and speculation amid the worst financial crisis in decades, members of the influential industry group Bankers Association of the Philippines said.

A new inter-bank lending facility using government securities as collateral would also be set up by the industry group to increase liquidity in the market, they said.

The measures, to be formally announced by the group on Friday before the 9:00am [0100 GMT] start of trade, was the industry's response to the central bank's call for a coordinated domestic response to the financial turmoil that has undermined local equities and the peso currency.

"I think it's a temporary effort to keep US dollar overbought positions to around $25 million," said a local banker.

The industry group came up with the measures after a series of meetings with the central bank this week.

Before the industry group finalised the measures, the central bank was studying a proposal to lower the limit on banks' open foreign exchange position to prevent capital flight and help lift the peso, down more than 15 percent so far this year.

The proposal aimed to lower banks' dollar overbought limit, or the ceiling on allowed foreign currency purchases from the market, to $20 million from the current $50 million or 20 percent of unencumbered capital, whichever is lower.

But the plan was opposed by some bankers, saying lowering the limit after it was raised last year would send the wrong signal to foreign investors.

"The banks figured we'll do it on our own," a banker from a foreign lender said. "We'll police our own ranks."

Banks will start due diligence checks on foreign investments by clients, especially if it is reaches the $30 million maximum yearly investment allowed by the central bank without its prior approval.

"We want to make sure that these are really legitimate investments and that the money will not be used for arbitrage," a banker from a local lender said.

The banking industry will also set up a collateralised lending or repurchase agreement facility to ensure banks will continue to have access to interbank lending unlike in the United States where banks, unsure of the financial condition of their counterparty, simply refused to lend short-term money.

The central bank has said it was studying more moves aimed at increasing liquidity in the financial system, including a possible reduction in banks' reserve requirements.

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