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Banks comply with NDF cap

Posted on June 03, 2013

BANKS HAVE fully complied with a cap on non-deliverable forwards (NDFs) after a deadline passed last week, the Bangko Sentral ng Pilipinas (BSP) said.

"Yes, banks are in compliance," central bank Governor Amando M. Tetangco, Jr. said in an e-mail last Friday.

The BSP had given banks until May 26 to adhere to the NDF caps, imposed at individual and industry levels.

According to a circular issued in March, a domestic bank’s total gross exposure to NDF transactions should be limited to 20% of its unimpaired capital. Foreign banks have a higher ceiling of 100%.

The industry cap, meanwhile, is internal to the BSP.

"The industry NDF level now is estimated at $5-6 billion from $11-12 billion prior to the NDF agreement," Bankers’ Association of the Philippines President Lorenzo V. Tan said.

At its height in 2010, the NDF level reached as high as $15 billion, Mr. Tetangco has noted. This "undue concentration" of NDFs had prompted the issuance of the new rules, which the BSP said would help mitigate systemic risks.

NDFs are a hedging facility, allowing market players to set a value for the peso against a foreign currency for a specified time in the future. Upon the contract’s maturity, the difference between the NDF rate and the prevailing exchange rate will be paid between the parties.

The BSP said the facility was no longer being used as a hedge but as an investment outlet for parties who wanted to earn from currency play. The speculation, in turn, created volatility in the foreign exchange market.

"The BSP 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 in March.

The peso is among the world’s strongest-gaining currencies. It was the third most appreciated as of April, having strengthened by 25% since 2007.

Only the Chinese renminbi and the Singapore dollar saw a sharper rise with gains of 29% and 26%, respectively, in the same period.

The peso closed at P41.05 against the dollar in 2012, well above the P42-45 exchange rate assumed by the BSP. It stayed in P40-41 territory earlier this year, only dropping to P42 two weeks ago as the US saw signs of economic recovery. -- Diane Claire J. Jiao