SEOUL, March 25 (Reuters) - South Korea's National Pension Service (NPS) will work to raise its strategic hedging ratio over the long term to help stabilize the fragile won, according to two sources with direct knowledge of the fund's discussions with the government and the central bank.
The NPS, the world's third-largest public pension fund, typically avoids hedging its overseas assets to maximize gains from a strong U.S. dollar, but retains the right to use rule-based tools for 'tactical' and 'strategic' hedging of up to 15% of its foreign assets during sharp currency moves.
"A consensus was reached on three points: first, the need to expand the strategic hedging ratio in the long term; second, plans to move forward quickly with forex bond issuance; and third, the method for evaluating the fund's performance," one of the sources said.
The pension fund, the country's largest institutional investor with approximately $530 billion in foreign assets, has been in discussions with government ministries and the Bank of Korea since November on ways to balance the fund's returns and foster foreign exchange stability.
The details of the "New Framework" meeting are being reported by Reuters for the first time. The sources declined to be named due to the sensitivity of the matter.
The exact ratio has yet to be determined as any decision reached by the four parties will require final sign-off from the NPS' fund management committee, which will also finalize the details on the ratio, according to the sources.
"There are limitations for the pension fund to drastically change its hedging policy, considering its investment returns, hedging costs and market uncertainty," said Park Sang-hyun, an economist iM Securities.
"It will still reduce dollar demand in the onshore market in the long run, but much of the market's focus is on the Middle East situation now."
The won was little changed around 1,500 per dollar as of 0618 GMT. Earlier this week, the currency slumped to its weakest level since March 2009 at 1,518.4.
"Market reaction is not as big as yesterday, because it is not like the pension fund is selling dollars immediately," one currency trader said, referring to Reuters' report on Tuesday that the NPS was conducting hedging operations, which briefly lifted the won.
The welfare ministry, finance ministry, the BOK and the NPS declined to comment for this story.
WON UNDER THE PUMP
The won has been one of Asia's worst-performing currencies over the past year, battered by uncertainty over how South Korea will finance $350 billion in investments pledged to U.S. President Donald Trump. That uncertainty has fuelled dollar hoarding by retail investors and exporters, while renewed tensions linked to the Middle East conflict have added further pressure on the currency.
The specific rules that allow the NPS to use hedging in certain periods are not disclosed to the public to deter speculators from using those hedging formulas to place any bets against the won.
But South Korea's foreign exchange authorities have been pressing the NPS to adopt a more flexible currency-hedging strategy, arguing that its onshore dollar trading to fund overseas investments have at times weighed on the won.
The fund management committee, whose mandate is to look out for the interests of taxpayers, is chaired by South Korea's welfare minister and its members also include private sector players.
The council also agreed that the NPS should "swiftly" issue forex bonds for the first time to diversify its dollar financing and tweak the performance evaluation system.
The changes will make the fund's performance assessment scheme neutral to foreign exchange effects, which will help resolve any misunderstandings such as when the fund favours a weaker won at certain times to maximize returns, one of the sources said.
(Reporting by Cynthia Kim, Jihoon Lee and Yena Park, Additional Reporting by Youn Ah Moon; Editing by Brenda Goh and Shri Navaratnam)
By Cynthia Kim, Jihoon Lee and Yena Park
