Bloomberg News

Philippine Central Bank Orders Capital Charge on NDF Trades

October 28, 2011

(Updates with NDF rate in fifth paragraph.)

Oct. 28 (Bloomberg) -- The Philippine central bank will ask banks to set aside more funds to cover non-deliverable currency forwards starting in January to reduce systemic risk and curb speculation, it said in a statement today.

Bangko Sentral ng Pilipinas raised the capital charge on NDFs for “net open positions” to 15 percent from 10 percent, according to the statement posted on the website. The central bank recognizes that the derivatives have attracted speculators so “we need to put in place pro-active and prudential measures,” Governor Amando Tetangco said in the release.

“Gains and losses from trades are a private matter between counterparties,” he said. “But these gains and losses have consequences on market volatility, difficulties in closing out foreign-exchange liabilities and even the safety and soundness of banks.”

The peso rose 0.6 percent to 42.62 per dollar at the close of trading in Manila, completing a 2.6 percent gain this month, according to Tullett Prebon Plc. The currency reached a three- year high of 41.90 on Aug. 1. Markets in the Philippines are shut for a holiday on Oct. 31.

Forward Rates

Non-deliverable three-month forwards in the currency were little changed at 42.44 per dollar today, and strengthened 2.6 percent for the week, according to data compiled by Bloomberg. That was the biggest five-day gain since May 2009.

Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars and are favored by many investors because funds don’t have to be deposited and registered locally.

A one-way bet that the currency will strengthen against the dollar, carried out through the NDF trade may be “de- stabilizing” should market conditions reverse, the central bank said in the statement.

Agreements made by banks three times this year to voluntarily set limits on their NDF trades “do not address the potential ramifications when trends in foreign-exchange rates reverse,” Tetangco said.

--With assistance from Karl Lester Yap in Manila. Editors: Simon Harvey, Sandy Hendry

To contact the reporters responsible for this story: Clarissa Batino at cbatino@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.


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