BSP Implements Reforms in the Foreign Exchange Derivatives Market

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has approved amendments to foreign exchange (FX) regulations to broaden Filipinos’ access to more hedging instruments and deepen the country’s capital market.

The amended regulations, contained in BSP Circular No. 1212, expand the list of allowable FX hedging instruments involving the Philippine peso. Currently, permitted instruments are deliverable and non-deliverable FX forwards, FX swaps, and cross-currency swaps. Under the revised rules, non-deliverable swaps, non-deliverable cross-currency swaps, and FX options, among others will also be allowed.
 
Hedging, which refers to the use of financial instruments to mitigate risks from fluctuations in exchange rates and interest rates, benefits individuals and businesses like overseas Filipino households, exporters, and importers.

The Monetary Board has also approved other amendments to FX rules:

• Lifting the requirement for deliverable FX forwards to have maturity dates matching the underlying FX exposure. Maturity dates can now be equal to or shorter than the underlying FX exposure, allowing flexibility when no matching FX derivatives are available.
• Clarifying the rules applicable to banks when transacting in FX derivatives for their own account and in transacting with customers.
• Implementing an online system for the submission of applications for registration of foreign investments.

Banks are given a six-month transition period from the effectivity of Circular No. 1212 to make the necessary adjustments to their systems and processes and ensure compliance with the revisions in the reports and new reporting guidelines.

The circular shall take effect 15 banking days after its publication either in the Official Gazette or in a newspaper of general circulation in the Philippines.

FX forward refers to an agreement for delayed delivery of a foreign currency in which the buyer agrees to purchase and the seller agrees to deliver at a specified future date a specified amount at a specified exchange rate.

FX swap refers to an agreement involving an initial exchange of two (2) currencies, usually at the prevailing spot rate, and a simultaneous commitment to reverse the exchange of the same two (2) currencies at a specified future date and using an exchange rate different from the previous.

Cross-currency swap refers to an arrangement in which two (2) parties exchange a series of cash flows in one (1) currency for a series of cash flows in another currency, at specified exchange and/or interest rates and at agreed intervals over an agreed period.

Non-deliverable swap refers to a variation of an FX swap agreement wherein there is no exchange of the two (2) currency cash flows; instead, the net difference between the contracted rate in the swap contract and the spot rate is paid by one party to the other.

Non-deliverable cross-currency swap refers to a variation of a cross-currency swap wherein the difference between the contracted interest rates is settled on a cash basis, without necessitating the delivery of either of the two (2) currencies involved in the swap.

FX option refers to a contract that gives one (1) party the right but not the obligation to buy or sell one (1) currency against another at a certain time for a certain price.

The guidelines on the use and date of implementation of said system shall be covered by separate issuances.