BSP narrows room for currency speculation
The Bangko Sentral ng Pilipinas (BSP) tightened the regulations on foreign exchange (FX) derivatives involving the Philippine peso in a bid to ensure that such financial contracts are not used for speculative activities.
Circular No. 1212, signed by Governor Eli Remolona Jr., compelled banks authorized by the BSP to transact in nondeliverable FX derivatives to ensure that these products were used for “legitimate economic purposes.”
At the same time, the BSP also allowed banks to submit documents to support the sale of FX and other FX transactions electronically.
Simply put, derivatives are financial instruments whose value is based on the price movement of an underlying asset that can be used by investors to manage risk in their portfolios. These include futures, forwards, warrants and options contracts like “puts” and “calls.”
Derivatives help investors hedge against risk of market fluctuations. For instance, nondeliverable foreign exchange forwards (NDFs) can be used as a hedging tool to help shield businesses, mainly importers, from losses that may arise from foreign exchange volatility.
Hedging or not
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.
This, as 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.
“When an AAB (authorized agent bank) is transacting for its own account, the AAB shall ensure that the counterparty is a duly regulated financial institution authorized to deal in FX derivatives,” the new circular read.
During the Asian crisis that erupted in 1997, the BSP likewise tightened the rules on peso-dollar NDFs, as it was widely believed that these instruments had been used by currency speculators, thereby artificially raising demand for the greenback at the expense of the local currency.
As it is, there are more upcoming regulations covering FX derivatives.
Last month, the BSP started collecting comments on a draft circular that would include the other “variants” of NDFs—namely, nondeliverable swap and nondeliverable cross-currency swap—among the derivative contracts that are subject to bank limits, higher capital charge and other requirements.
