BSP: FX forwards must have legitimate economic purpose

THE BANGKO SENTRAL ng Pilipinas (BSP) reminded authorized agent banks (AABs) that non-deliverable foreign exchange (FX) derivative transactions must serve legitimate economic purposes.

In a memorandum signed by BSP Governor Eli M. Remolona, Jr., the central bank told AABs to restrict the use of such instruments, especially non-deliverable forward transactions (NDFs) where banks sell foreign currency against the peso to nonresident financial institutions, for legitimate economic activities.

“The BSP made it clear that NDFs should have underlying legitimate economic activities supported by proper documentation,” it said in a separate statement released late Wednesday.

These economic activities include AABs’ hedging of their own investments

“This type of non-deliverable FX derivatives transactions involving the sale of FX against the PHP that is not supported by specific, identifiable underlying exposures and documentation, particularly those for speculative positioning, directional peso exposure, or arbitrage-driven activities are not allowed,” the BSP said in the memo.

FX derivatives refer to derivatives that involve the buying or selling of foreign currency against the peso. These include forward FX contracts, non-deliverable forwards, FX swaps, non-deliverable swaps, cross currency swaps, non-deliverable cross currency swaps, and FX options.

The latest memo came as a clarification to the circular issued in April last year, which expanded the BSP’s definitions of certain FX derivatives by introducing amendments to the Manual of Regulations on Foreign Exchange Transactions.

Banks are now expected to ensure that all upcoming contracts and renewals of the said non-deliverable FX derivatives are compliant with the issuance, the central bank said.

“AABs are expected to maintain adequate internal controls, governance processes, and audit trails, including the necessary supporting documents, to ensure compliance,” it added. — Katherine K. Chan