MANILA, Philippines — The Bangko Sentral ng Pilipinas’s (BSP) foreign exchange (FX) swaps declined further to $7.7 billion at the end of October, $1.64 billion lower compared to the forward positions registered in September.

The BSP has been unwinding forwards and futures in foreign currencies as part of intervention measures to contain foreign exchange market swings. In the last three months, the central bank has been maintaining up to three months maturity of FX forwards only, having let go of one-year maturity spreads.

About $3.26 billion of swaps matured in October and $3.45 billion in November. Some $4.25 billion positions will be maturing in one to three months. When the BSP lets these positions mature, the FX liquidity is returned to the financial system. Unwinding maturing FX swaps is considered an effective tool in controlling FX convertibility.

BSP Governor Amando M. Tetangco Jr. said earlier that the BSP will unwind more FX swaps as the situation dictates.

Forwards or swaps as derivative instruments are used as defensive approach to a highly volatile market. It is a financial transaction between two parties which agreed to exchange two currencies at a certain exchange rate in an agreed future date.

FX swaps are part of the country’s FX reserves but not officially reported in the gross international reserves. At the end of October, the BSP's official reserve assets totaled $75.83 billion, of which $65.42 billion are foreign currency reserves in securities and deposits in national and overseas banking institutions.

In the meantime, last October the BSP raised the market risk weight of non-deliverable forwards or NDFs to 15 percent capital adequacy ratio from 10 percent to reduce potential systemic risk from NDFs transactions due to exchange rate volatility. NDFs are interbank transactions supposed to minimize exposure risk to fluctuations of foreign currencies. These involve futures contract in currencies that are not heavily traded or easily converted.

NDFs, like FX swaps, are hedging instruments for banks that do not have enough or sufficient FX to settle future currency contracts.