Central bank opens FX hedging facility

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THE BANGKO SENTRAL ng Pilipinas (BSP) has issued guidelines for a reopened facility allowing borrowers to hedge against foreign exchange (FX)-related risk.

The BSP said in a statement last weekend that bank clients with obligations of at least $50,000 can avail of the Currency Rate Risk Protection Program (CRPP), which is designed to temper uncertainties due to foreign exchange (FX) exposure.

The Monetary Board approved the rules for availing of the CRPP within a week after BSP Governor Nestor A. Espenilla, Jr. said the program would be revived to “ease demand pressures” at the foreign exchange spot market.

The peso has depreciated by 7.54% against the dollar year-to-date, among the weakest in the region next to the Indian rupee and the Indonesian rupiah, Reuters said in a report on Friday.

The CRPP facility is a non-deliverable peso-dollar forward (NDF) contract between the BSP and local universal and commercial banks that will provide a hedge fund for bank clients wanting to shield themselves from potential FX-related losses.

Under the facility, parties agree that on maturity of the forward contract, only the difference between the contracted forward rate and the spot rate will be settled in pesos.

Covered are unhedged loans and payables expressed in a foreign currency such as BSP-registered short-term trade loans, medium- to long-term trade loans maturing within 90 days from date of CRPP application, short-term trade borrowings made by oil companies from offshore banking units and US dollar trust receipts, among others.

Hedging contracts will last 90 days, although clients have the option to reavail, the BSP said.

BSP Deputy Governor Diwa C. Guinigundo has said that the CRPP is meant to assure companies that they will be “protected” from exchange rate fluctuations.

This is expected to ease dollar demand as it enables businesses to hold off running to the spot market to cover future requirements. Getting their exposures hedged addresses liability concerns should the peso weaken further.

Mr. Guinigundo noted that the peso’s recent weakness has been largely due to external developments, particularly the US-China trade war.

The CRPP was introduced in 1997 as a measure to address the impact of foreign exchange volatility during the Asian Financial Crisis. It was then updated in 2005 while the last availment was in 2009.

Central bank officials decided to revive the facility just as the peso breached fresh 12-year lows early September, with the local unit even breaching the P54-to-$1 level last week. The local currency recovered slightly on Friday last week, closing at P53.97 to the greenback.

Incentives will be given to banks that offer the hedging facility, the central bank said. “Exposures under the CRPP facility shall not be subject to NDF position limits,” the BSP said, adding that “reduced market risk capital charges shall be applied for net open positions for NDFs under this facility.” — Melissa Luz T. Lopez