In April this year, the Bangko Sentral ng Pilipinas (BSP) issued Circular No. 1212, a comprehensive update to the rules on foreign exchange (FX) derivatives involving the Philippine Peso. The circular revises the Manual of Regulations on Foreign Exchange Transactions (MORFXT) and the Manual of Regulations for Banks (MORB), introducing tighter controls and clearer standards for banks and their customers.
At its core, the circular aims to deepen the domestic financial markets while reducing speculative activity. The BSP’s message is clear: FX derivatives are tools for managing real financial risks, not for gaming the currency markets.
DERIVATIVES TO HEDGE, FUND FX TRANSACTIONS
A central feature of the circular is its insistence that FX derivatives (e.g., forwards, swaps, and options) be used solely to hedge actual FX exposures or to cover legitimate funding needs. This includes transactions such as payments for imported goods or servicing of foreign currency loans.
By contrast, speculation is explicitly prohibited. The circular requires that the total amount of FX a customer may hedge using derivatives (or buy on a spot basis) must not exceed the actual amount of the underlying FX exposure. This means that clients cannot use derivatives to bet on the direction of exchange rates. Likewise, once an FX exposure is already fully hedged using deliverable derivatives, the same exposure cannot be used as a basis to purchase additional FX.
This limitation may affect how corporates approach their treasury strategies, particularly those accustomed to entering into derivative structures with leverage or optionality. The key question now becomes: how will banks and clients define, measure, and document an “underlying exposure,” and how will the BSP treat more complex commercial or financial structures that involve foreign currency elements?
REBOOKING OF CONTRACTS RESTRICTED
The circular also addresses the practice of canceling and rebooking non-deliverable FX derivatives. This was previously used by some market participants to manage their FX positions more flexibly, or even opportunistically.
Under the circular, if a non-deliverable contract is pre-terminated or canceled, the customer may only enter into a new one for the same exposure if the original financial terms have materially changed. What qualifies as a sufficient “change” in terms (e.g., refinancing of debt, restructuring of payments, or partial payments) may become a focus of discussions between banks and their clients.
BANKS TO MEET STRICTER STANDARDS
The circular also lays down ground rules for authorized agent banks (AABs) engaging in FX derivatives on their own account. These transactions must be for legitimate economic purposes and conducted only with duly regulated financial institutions. For example, a bank may enter into a non-deliverable forward (NDF) contract with a non-resident counterparty, but must ensure that the transaction is not purely speculative.
This restriction may limit the ability of local banks to act as liquidity providers in the FX market, particularly for peso-linked NDFs, which are widely used offshore. It also raises the question of how the BSP will monitor the economic purpose of a bank’s proprietary trading desk, and whether the broader effect might be reduced liquidity or pricing efficiency in the peso derivatives market.
SCOPE OF HEDGING NARROWED
The BSP has introduced a notable prohibition: Philippine branches of foreign banks and firms may no longer hedge their permanently assigned capital using FX derivatives. This suggests that the BSP views capital assigned to Philippine branches as subject to full exchange rate risk, without recourse to hedging tools. Firms operating through a branch structure may need to revisit how they manage capital at risk due to currency movements, especially if assigned capital is sizable or denominated in foreign currency.
PRACTICAL, STRATEGIC IMPLICATIONS
The Circular’s broader impact will depend on how strictly its rules are enforced and how flexibly BSP interprets compliance in light of evolving market practices. While the BSP has not barred the use of derivatives entirely, it has drawn a sharper line between legitimate hedging and speculative activity.
Corporates with international exposures may find it timely to review their existing FX strategies and consider how exposures are defined and tracked. For banks, the emphasis may now shift toward strengthening internal standards on client eligibility, transaction assessment, and consistency with BSP expectations.
The circular presents both challenges and opportunities. It invites market participants to reconsider how risk is managed and how to do so in a manner that satisfies both commercial needs and regulatory scrutiny. As the circular takes full effect, one thing remains clear: the BSP is committed to a derivatives market that is disciplined, transparent, and grounded in real economic activity. How the private sector adapts to that standard may shape the next phase of FX market development in the Philippines. n
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.
Ralph Vincent S. Samaniego is an associate of the Corporate and Special Projects department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW)
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