Stricter offshore forex trade rules sought
The Bangko Sentral ng Pilipinas (BSP) wants to further limit banks’ engagements in offshore foreign exchange (forex) trades to prevent a buildup of systemic risks emanating from speculative activities that can add to peso volatility.
Stakeholders have until March 26 to send their feedback to a BSP draft circular seeking to amend regulations that banks must follow when trading non-deliverable foreign exchange forwards (NDFs) involving the local currency.
A foreign exchange forward contract refers to an agreement to buy or sell foreign exchange at a specified price but for delivery and payment in the future. In the case of NDFs, only the price differential is settled upon maturity.
But over the years, the BSP had to tighten the rules on NDF transactions due to their tendency to directly or indirectly create systemic risks.
NDFs can be used as a hedging tool to help shield businesses, mainly importers, from losses resulting from foreign exchange volatility. But regulators had previously suspected that some banks might be trading NDFs not only to meet the hedging needs of their corporate clients but also to earn from peso speculation.
In the past, over-trading of NDFs was believed to have put a lot of pressure on the peso for it to appreciate rapidly, hurting the BSP’s efforts to temper volatility. Whenever the local currency is appreciating too fast against the dollar, exporters and households supported by overseas Filipino workers are hit hardest.
Other NDFs
The draft circular wanted to include the other “variants” of NDFs—namely, non-deliverable swap (NDS) and non-deliverable cross currency swap (NDCCS)—among the derivative contracts that are subject to bank limits, higher capital charge and other requirements.
In an NDS transaction, there is no exchange of the two currency cash flows. Instead, the net difference between the contracted rate in the swap contract and the spot rate is paid by one party to the other.
Meanwhile, NDCCS is a currency swap deal wherein the differences between the exchange rates and interest rates are settled on a cash basis, without necessitating the delivery of either of the cash flows on the two currencies involved in the swap.
Once approved by the BSP, peso NDS and NDCCS trades would also be subjected to the current exposure limit of 20 percent of qualifying capital for domestic banks, and 100 percent for foreign bank branches. Such limits, however, exclude peso NDF transactions with the BSP.
“To mitigate the buildup of systemic risks and protect against undue concentration in market usage, the prudential guidelines are set in place,” the draft document read.
