BSP to banks: Trim NDF holdings

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has formally ordered banks to trim their holdings of peso non-deliverable forwards (NDF) according to limits announced in December, warning that violators could be reprimanded, forbidden to declare dividends or at the most, shut down.

“The Bangko Sentral ng Pilipinas is cognizant that NDFs may, directly or indirectly, create system-wide risks even if there is no delivery of principal amounts and even when NDFs are used as a hedge,” the central bank said.

NDFs are short-term currency contracts which allow the holder to book profits by settling the difference between the contracted exchange rate and the prevailing rate at the time of maturity.

To mitigate risks associated with these contracts, the central bank said local banks must limit their NDF transactions to 20 percent of their capital. Foreign bank branches, meanwhile, are given a higher 100-percent limit.

The cap was meant to shun speculative inflows, which in turn, contribute to peso volatility and strength. Such activity could be detrimental to over-all economic activity.

“Banks which are presently in excess of the NDF exposure limits shall be given two months from the effectivity of this circular to comply with the prescribed limits,” the BSP said.

Aside from the limit, lenders need to have Type 2 derivatives license to hold NDF contracts. Banks without such would need to “close out” their NDF positions upon the circular’s effectivity.

“All NDF transactions shall be covered by the appropriate reports prescribed by the Supervision and Examination Sector,” it said.

Banks that will violate the new rules face sanctions from the BSP.

A first offense may merit a “reprimand” for the banks’ directors and officers who will also be told to develop a “remedial plan” to avoid breaching NDF limits again.

As for subsequent offenses, monetary officials could “restrict” or “prohibit” banks from securing other licenses, declare dividends or even be ordered to “cease and desist” from conducting business.

Last month, BSP Governor Amando Tetangco Jr. said NDF holdings have dropped to $3 billion from their 2010 peak of $15 billion as banks prepare for the cap’s implementation.