THE MONETARY BOARD approved last month new rules governing foreign exchange (FX) transactions of banks, hiking the limit on their net open foreign exchange position (NOP) as part of the central bank’s move to further liberalize the market.
The Bangko Sentral ng Pilipinas (BSP) has raised the net FX position limit to 25% of the qualifying capital of the banks or up to $150 million, whichever is lower, BSP Governor Benjamin E. Diokno said at a press briefing on Thursday, from the previous cap of 20% or $50 million set in 2007.
The adjustment, along with other changes adopted on May 20, will take effect on Aug. 1.
“The upward adjustment in the limit is in response to the higher demand for foreign exchange in the Philippines owing to the growth in the volume of trade transactions and investments,” Mr. Diokno said.
The foreign exchange market has grown massively since the limit was last raised, he said, with transactions rising at 50% annually along with overall trade transactions. The country’s gross international reserves, along with the banking system’s assets, have also more than tripled in the past 13 years.
“The new rules are enhancements to the overall framework for the management of banks’ open FX positions. Increasing the limit aims to improve liquidity in the market. This will benefit not only bank clients but also the banks themselves,” he said.
The basis for the limit was also changed to qualifying capital from unimpaired capital previously to align it with the standard used to measure a bank’s buffers versus foreign exchange risk.
The central bank will also use a “shorthand” approach in computing the NOP of banks, using the higher of the absolute value of the sum of net long or short positions in individual currencies.
Mr. Diokno said the new scheme will not assume currencies that banks hold would move in a similar manner, meaning a long position in one currency will not offset a short position in another currency, contrary to the previous method which allowed for the offsetting of positions across different currencies.
“The new computation methodology makes the calculation and measurement of banks’ open position more risk-based. These changes will help banks have a more consistent view of the impact on capital of their overall exposure to forex risks. These amendments are among the many initiatives the BSP has undertaken to liberalize the forex market,” he said.
The BSP also revised its regulations to adopt a supervisory framework that will address potential breaches in banks’ NOP limit and provide the regulator flexibility in imposing sanctions.
“The new regulations allow for the use of a range of supervisory actions depending on the gravity and persistence of limit breaches. These may range from corrective actions to the curtailment of activities that give rise to excessive risk and sanctions on the bank and its directors and officers,” the central bank chief said.
“The application of the supervisory framework aims to ensure that foreign exchange risk does not threaten a bank’s safety and soundness,” he added.
Mr. Diokno said the BSP regularly revises its FX regulatory framework to make sure current policies remain appropriate and supportive to the changing economy.
“The upcoming wave of foreign exchange reforms will primarily focus on trade and non-trade current account transactions, with liberalized rules that are supportive of the BSP’s thrust to further facilitate digital payments,” he added. — B.M. Laforga