BSP seeks to amend rules on forwards, swaps

The Bangko Sentral ng Pilipinas (BSP) is proposing amendments to regulations on non-deliverable exchange forward and swap contracts involving the peso, which will allow the pre-termination or cancellation of contracts before maturity date, among others.

In a draft circular, the central bank released proposed amendments to the Manual of Regulations for Banks (MORB) on non-deliverable foreign exchange forward (NDF), non-deliverable swap (NDS) and non-deliverable cross currency swap (NDCCS) contracts involving the peso.

“The BSP is cognizant that NDFs, including its variants NDS and NDCCS may, directly or indirectly, create system-wide risks even if there is no delivery of principal amounts and even when such non-deliverable FX (foreign exchange) derivatives are used as a hedge.”

“To mitigate the buildup of systemic risks and protect against undue concentration in market usage, the following prudential guidelines are set in place,” it added.

The draft circular seeks to define NDCCS as “a variation of a cross-currency swap wherein the differences between the exchange rates and interest rates are settled on a cash basis, without necessitating the delivery of either of the cash flows on the two currencies involved in the swap.”

The proposed rules also remove the definitions of peso NDF, peso NDF sale to nonresidents, and onshore non-deliverable forwards. It instead includes definitions for peso NDS and peso NDCCS.

“All NDF, NDS and NDCCS contracts with residents shall be settled in Philippine pesos,” it added.

The BSP also removed the provision that states that NDF contracts cannot be pre-terminated before their fixing date.

“Pre-termination or cancellation of an NDF, NDS or NDCCS contract before its maturity date shall be allowed, subject to mutual agreement between the counterparties and appropriate disclosure of the terms and conditions on the pre-termination or cancellation, including the settlement amount (e.g., market-to-market value of the contract) and the responsible party that will assume the cost of pre-termination or cancellation, among others,” it said.

“Furthermore, if an NDF, NDS or NDCCS contract is pre-terminated or canceled, contracting parties may only enter into another NDF, NDS or NDCCS contract for the same underlying transaction if there is a change in the original financial terms of the underlying transaction.”

The draft circular proposes guidelines on limits for banks’ peso NDF, peso NDS and peso NDCCS exposures.

“To mitigate any potential buildup of systemic risks, a bank’s total gross exposures to all forms of Peso NDF, Peso NDS and Peso NDCCS transactions, i.e., the sum of the notional amount of the sale and purchases for both onshore and offshore transactions shall be limited to a fixed percentage of the bank’s capital base.”

Under the draft rules, the exposure is capped at 20% of qualifying capital for domestic banks while foreign bank branches shall have a limit equal to 100% of their qualifying capital.

However, this limit does not apply to peso NDF transactions with the BSP, it added.

“A bank with purchases and sell position against a counterparty with the same fixing date may consolidate said positions for the purpose of bilateral net settlement.”

The draft rules also include NDS and NDCCs in the higher capital charge applicable to NDFs.

They also detail the reportorial requirements for NDF, NDS and NDCC transactions, which shall be covered by the report on non-deliverable forward and swap transactions.

“Pre-terminated and canceled NDF, NDS and NDCCS transactions that were used by a bank as end-user, as defined in Section 613 of the MORB, shall be submitted under the new report namely Report on Pre-termination and Cancellation of Non-Deliverable Forward and Swap Transactions.”

“The pre-terminations and cancellations shall be subject to an assessment of reasonableness and frequency tests to determine its validity. All outstanding NDF, NDS and NDCCS transactions shall likewise be included in the calculation of the capital adequacy ratio (CAR) and reflected in the CAR report.” — Luisa Maria Jacinta C. Jocson