Kuwaiti banks must comply with regulatory guidelines when trading derivatives but are not otherwise restricted from doing so, the central bank told Reuters on Tuesday, effectively confirming that a ban had been lifted.
The statement from the governor’s office of The Central Bank of Kuwait (CBK) came after a newspaper reported on Monday that a ban brought in following the global financial crisis on trading derivatives with foreign banks had ended.
The story had a dramatic effect on the Kuwaiti dinar, which rose sharply against the dollar in the forwards market, as traders bet that increased liquidity in the market would lower the interest rate differential between the two currencies.
“As per CBK circular dated October 12, 2006, banks in Kuwait are allowed to swap foreign currencies against Kuwaiti dinars in addition to outright transactions and foreign exchange forward transactions,” the statement said.
“We would like to clarify that instruments are meant to be plain vanilla in nature and used for hedging or trading purposes. Therefore, such instruments are neither complex/structured derivatives nor speculative in nature.
“As is normal, banks are expected to maintain adequate internal controls and comply with CBK regulations when dealing in these instruments,” the statement added.
While the statement said there was no new circular or rules governing the trading of derivatives, the fact the regulator was referring to legislation in place prior to the 2008 ban can be interpreted to mean the market is reverting to previous rules.
The central bank clamped down on derivatives trading in 2008 as Kuwaiti banks were hit hard by the debt problems of local investment firms during the global financial crisis.
One, Gulf Bank, was forced into a $1.3 billion emergency capital increase because of losses incurred through the instruments.