Bangko Sentral puts cap on risky currency deals

To temper risky “speculative” inflows pouring into the country – a major cause of a strong peso – the Bangko Sentral ng Pilipinas on Wednesday said it imposed limits on bank access to currency contracts.

 

In a briefing, Bangko Sentral Governor Amando Tetangco, Jr. told reporters “a total market cap that will be internal to the BSP and reflects its current level in the market will be introduced” on transactions involving non-deliverable forwards (NDF).

 

The policy-making Monetary Board also approved a ceiling on foreign exchange forwards for local and foreign banks based in the country, the Bangko Sentral chief said. 

 

As such, local banks will be allowed to transact only up to 20 percent of their capital and their foreign counterparts a limit of up to 100 percent of capital.

 

NDFs are dollar-based derivatives that are traded offshore and can be used for hedging and for taking a position on a currency. These are futures transactions between two parties to buy or sell foreign exchange at an agreed price.

 

Tetangco noted the pre-termination of NDF contracts would be prohibited and banks will have to secure a license to use such instruments. 

 

Banks have until March 2013 to adopt the new measures.

 

“This limit is going to provide a cap that is based on a clear policy anchor instead of what was earlier agreed upon by individual banks – a gentleman’s agreement,” Tetangco said, adding that NDFs have evolved “from a legitimate hedging tool to a tool for speculation.” 

 

Speculative flows in the foreign exchange and stock markets, like NDFS, have spurred volatility in the peso-dollar market and caused sharp appreciation of the peso by over 7 percent in the year-to-date.

 

Foreign portfolio investments – also known as hot money given the ease with which they enter and exit a country – registered a two-year high in November with a net inflow of $1.009 billion, more than double the $490.35 million a year earlier. 

 

With just days left in the year, the net inflow of hot money reached $3.673 billion, well above the Bangko Sentral’s full -year forecast of $3.2 billion, central bank data showed — VS, GMA News