The Bangko Sentral ng Pilipinas (BSP) yesterday issued the official circular that further restricted banks’ non-deliverable forwards (NDF) in peso and allowed banks two more months to comply with the new rules.
BSP Circular No. 790, signed by BSP Governor Amando M. Tetangco Jr. on March 6, detailed the guidelines on the macro-prudential measure for handling peso NDFs which for local banks it is limited to 20 percent of unimpaired capital while foreign bank branches’ cap is set at 100 percent.
In the circular memo, a two-month transitory period starting this week will be implemented to give banks in excess of the NDF exposure limits enough time to comply. “However, banks with peso NDF exposures (that) do not have at least Type 2 derivatives license are not allowed to enter into further peso NDF exposures except to close out said positions,” said Tetangco.
The BSP capped NDF exposures to manage potential system-wide risks that inevitably arise due to speculative hits on the local currency and to “mitigate the build up of systemic risks and protect against undue concentration in market usage.”
The new regulation also deleted the previous rule on foreign exchange transactions requiring prior BSP clearance for forward contracts involving the sale of foreign exchange to non-residents that have no full delivery of principal, including cancellations and roll-over/renewals.
The circular memo said it 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 hedge.”
Peso NDFs, which are transacted by both onshore and offshore banks, are forward foreign exchange contract involving the value of the peso against a foreign currency at a specified maturity date on an agreed amount.
To “square” existing NDF positions for banks that have no Type 2 derivatives license, a bank may do bilateral netting to consolidate existing positions.
Banks with Type 2 derivatives license can act as both dealer and broker for all types of derivative contracts.
The central bank has been reviewing the derivatives licenses of 17 universal and commercial banks and three thrift banks as part of its close monitoring on the type of derivatives that banks are transacting and are engaged in.
BSP documents show that of 17 banks, only 10 banks have Type 2 authority or the limited dealer authority who can also transact as end-user and dealer. These banks can act as dealer for specific types of derivatives such as forward, swap or option products with specific underlying reference, for example interest rates, equity or commodity.
Banks that have Type 2 authority are Bank of the Philippine Islands, BDO Unibank and BDO Private Bank, Metropolitan Bank and Trust Co., Rizal Commercial Banking Corp., Security Bank Corp., Union Bank of the Philippines, Bank of America, Bank of Tokyo and Mizuho Corporate Bank.
The three thrift banks with additional derivatives authority, on the other hand, are HSBC Savings Bank, Metrobank’s Philippine Savings Bank and Sterling Bank of Asia.