BSP to allow pre-termination of peso NDFS

The Bangko Sentral ng Pilipinas (BSP) will soon allow the pre-termination of peso non-deliverable forwards (NDFS) as part of ongoing amendments of its foreign exchange (FX) regulations. In a draft circular which banks are given until June 15 to comment or make recommendations, the BSP also said cancellations, rollovers or non-delivery of FX forward and swap contracts will have additional guidelines. By BSP definition, peso NDFS are forward FX contracts involving the peso against a foreign currency at a specified maturity date on an agreed notional amount. In these transactions, only the net difference between the contracted forward FX rate and the spot exchange rate between the peso and the foreign currency at the fixing date will be settled. The BSP wants to amend the peso NDFS by allowing banks to pre-terminate these contracts. Prior to the proposed circular, pre-termination of NDFS are not permitted. The draft circular, updated as of May 19, 2023, said all NDF contracts with residents settled in peso can be pre-terminated before their fixing date. Meanwhile, the BSP said the validity of all cancellations, roll-overs, or non-delivery in the case of deliverable contracts of all FX deliverable forward contracts, and the forward leg of swap contracts will be subjected to an eligibility test and reporting requirements. As for the reporting requirements, the BSP said banks with derivative transactions will still be covered by existing reporting requirements on financial derivatives while cancellations, roll-overs, or non-delivery of NDF contracts and transactions under the forward leg of the swap contracts will be reported electronically not later than five banking days after the reference month. The BSP has not changed bank limits on peso NDF exposures which is 20 percent of unimpaired capital for domestic banks. Foreign bank branches have a limit equivalent to 100 percent of their unimpaired capital. The limits are a fixed percentage of a bank’s capital base and applies to gross exposures to all forms of peso NDF transactions such as sales and purchases for both onshore and offshore deals. The BSP imposes limits to NDF exposures to prevent any systemic risk build-up. NDFS are normally used as a hedge. Last April, the BSP updated and enhanced its dormant Currency Rate Risk Protection Program (CRPP) to strengthen the peso visà-vis the US dollar and to ensure corporate borrowers with substantial FX exposures will have adequate FX supply. The CRPP, first introduced during the 1997 Asian Financial Crisis and reactivated in 2018, allowed bank clients to hedge their eligible foreign currency transactions and obligations. The facility is US dollar-peso NDF contract between the BSP and the commercial banks. The CRPP has a $50,000 current and outstanding minimum for hedging with a maximum tenor of three months or 90 days.