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Keisha Ta-Asan - The Philippine Star
March 14, 2025 | 12:00am
These changes apply to non-deliverable forwards (NDFs), non-deliverable swaps (NDSs) and non-deliverable cross-currency swaps (NDCCSs) involving the Philippine peso.
Businessworld / File
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has issued a draft circular to introduce stricter rules on certain foreign exchange (forex) transactions to prevent excessive risks in the financial system.
These changes apply to non-deliverable forwards (NDFs), non-deliverable swaps (NDSs) and non-deliverable cross-currency swaps (NDCCSs) involving the Philippine peso.
The draft circular, which introduces stricter guidelines on the management and reporting of these financial instruments, aims to mitigate systemic risks in the foreign exchange market and ensure prudent banking practices.
Under the proposed changes, the BSP explicitly defines NDF, NDS, and NDCCS transactions in the Manual of Regulations for Banks. The new definitions highlight that these derivatives, while useful as hedging instruments, could pose system-wide risks if not properly regulated.
The amendments also introduce several key measures to strengthen financial stability. The BSP will now cap how much banks can be exposed to these transactions, ensuring that they do not take on excessive risk that could destabilize the market.
“To mitigate any potential build-up of systemic risks, a bank’s total gross exposures to all forms of peso NDF, NDS and NDCCS transactions shall be limited to a fixed percentage of the bank’s capital base,” the BSP said.
The limit is 20 percent for domestic banks. Foreign bank branches will have a limit equal to 100 percent of their qualifying capital.
The BSP will also mandate a higher capital charge for forex exposures in these instruments, reinforcing the importance of capital adequacy in banks.
The draft circular specifies that NDS and NDCCS transactions must be risk-weighted by 187.5 percent in lieu of the 125-percent factor applied to other forex exposures.
To enhance transparency, banks will be required to report all NDF, NDS and NDCCS positions in their capital adequacy reports. Banks will also submit detailed reports on NDF, NDS and NDCCS transactions under the revised capital adequacy ratio framework.
Additionally, stricter pretermination and cancellation rules will be enforced to prevent arbitrary unwinding of transactions, ensuring that cancellations are backed by legitimate underlying transactions.
The NDF is a type of contract wherein two parties agree on a future exchange rate for the Philippine peso against another currency. However, no actual physical exchange of money happens and only the difference between the agreed rate and the actual rate at the contract’s end is settled in cash.
The NDS is similar to an NDF but involves two transactions, one at the start and another at the end of the contract. It helps businesses and investors manage exchange rate risk over a longer period.
Meanwhile, the NDCCS is a more complex version wherein two parties agree to exchange payments based on both interest rates and currency movements, again without actually exchanging the physical currencies.
