BSP to issue stricter rules on hedging instruments

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is set to issue stricter rules on hedging instruments, particularly non-deliverable forwards (NDFs), to control liquidity amid the strong inflow of foreign capital and, at the same time minimize market risks.

BSP Governor Amando Tetangco Jr. said in an interview with reporters that they are set to come out with the final version of a circular governing the new rules on NDFs soon.

“Maybe within the next few weeks. We have exposed a draft circular to the banks to get their reactions. We will have this consultations and dialogue with the banks before coming out with the final version of the circular,” Tetangco stressed.

An NDF is a forward contract between two parties to buy or sell an asset such as foreign exchange for an agreed price and settlement in the future. Counterparties settle the difference between the contracted NDF price and the spot price upon maturity.

However, Tetangco said reports submitted by banks showed that NDFs are used not just as a hedging instrument but also for speculation.

“I don’t think so, originally the NDFs were really meant to provide an instrument for hedging legitimate transactions. Based on the reports that we have been getting from the banks themselves that doesn’t seem to be the case and a substantial portion of the NDF transaction appears to be of the speculative nature,” he added.

The BSP required banks to report their NDF transactions daily instead of weekly starting last June 1 to closely monitor the NDF market and curb volatility in the peso-dollar exchange rate.

“So I think there is going to be an adjustment because we told the banks that we do not favor transactions that are speculative in nature. They will have to adjust to that and in the long run it is going to be a good turn out when the exchange rate would be based on fundamentals rather than herd thinking or behaviour,” he said.

The proposed circular seeks to raise the current market risk weight of 10 percent so that banks would have to set aside more capital to cover their NDF exposure.

“We are still discussing that. We have not pinned down any rate yet,” the BSP chief clarified.

Banks earlier reached an agreement to cut their NDF volumes by 20 percent as transactions shot up late last year until early this year wherein bulk were speculative in nature resulting to increased peso volatility.

Latest data released by the BSP showed that the net inflow of foreign portfolio investments or “hot money” jumped 230 percent to $3.06 billion in the first eight months of the year from $925.96 million in the same period last year as foreign capital continued to flood emerging market economies, including the Philippines, albeit at a slower pace over the past few weeks.