the banks' local branches." Kim said HSBC Holdings PLC (HBC) and Credit Agricole S.A. (CRARY) have already been sanctioned for improper outsourcing of operations involving derivatives. A person familiar with the situation told Dow Jones Newswires later Tuesday that the Royal Bank of Scotland Group PLC (RBS) may also be sanctioned for engaging in similar activity, with the FSS likely to decide on the matter in June or July. Credit Agricole declined to comment, while HSBC had no immediate comment. "The FSS carries out regular audits of our activities in Korea. We have yet to receive the final outcome from their latest audit," RBS said in a statement. "We will co-operate fully with the FSS and it would be inappropriate to comment further at this time." Local authorities have introduced several measures since last June to safeguard the economy from potential shocks triggered by so-called hot money. Asia has seen a surge of foreign capital into its markets amid expectations for economic growth and higher interest rates as the region's central banks combat inflation--and Korea has been no exception to the trend. South Korea fears that capital inflows could exit just as swiftly, like they did during the 1997-1998 Asian financial crisis and the 2008 economic crisis. So the local government last June implemented a cap on the amount of foreign-exchange forwards positions that banks operating in the country can carry, as such contracts can be used to speculate on future market moves involving the South Korean won. Foreign banks have been under scrutiny because their Korean branches tend to take on short-term foreign currency loans to do business like corporate financing and trading of derivatives and securities--activity which can lead to sharp swings in financial markets, particularly the won. They are also often the intermediaries for foreign investors looking to move money in and out of the country. While not directly related to the current issues, the emphasis for greater regulatory supervision of foreign banks has been heightened following a Nov. 11 incident when Deutsche Securities Korea, the local unit of Deutsche Bank AG (DB), triggered a massive drop in the local stock market in the last 10 minutes of trade by selling KRW2.44 trillion worth of stocks. Local authorities subsequently ruled the Deutsche unit deliberately manipulated the market that day, dumping the shares on the stock market to profit on "speculative derivative positions" through the options and futures markets, and suspended the brokerage's proprietary securities and exchange-listed derivative trading operations for six months. "Foreign banking branches (in Korea) are considered to have a great effect in increasing the volatility of capital flows in and out of the market," the FSS said in a separate statement, explaining the need for greater monitoring of their business operations. A government official told Dow Jones Newswires Tuesday that Bank of Korea and the FSS are jointly probing the Korean operations of Mizuho Financial Grou