The central bank has issued a clarificatory memo on how it could be more flexible in dealing with breaches in the net open foreign exchange (FX) position (NOP) of commercial banks and thrift banks.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said in the memo (Memorandum No. M-2021-062) that the additional guidance and clarifications will explain banks’ NOP calculation as well as prepartion for the consolidated FX position report.
Under the new circular for net open FX position which was approved last June, a bank's NOP is calculated using the “shorthand approach”.
The memo explained that a bank will have to first get the US dollar equivalent of the net position in each individual foreign currency and then “add all net long positions and do the same for all net short positions.” The result is that the higher of the absolute value of the aggregated net long position and the aggregated net short position will be the bank's NOP, said the BSP.
The new NOP calculation provides the BSP the flexibility in dealing with breaches in the FX NOP limit.
It is not just the imposition of monetary penalties but implementing a supervisory framework that allows the BSP to deploy a range of supervisory actions depending on the gravity and persistence of NOP limit breaches, with the objective of ensuring that FX risk does not threaten a bank's safety and soundness.
The revised computation methodology took effect last August but many banks still have clarifications and queries to the BSP. The memo provides answers to frequently asked questions.
The BSP said it has adopted the shorthand approach to align the NOP computation with a bank’s FX position under the risk-based capital adequacy framework. “The use of this approach is likewise preferred as it recognizes the
imperfect correlation between the different currencies that banks hold. In reality, a long position in one currency cannot be expected to perfectly offset a short position in another currency,” explained the BSP. The shorthand approach is also widely accepted and used by other jurisdictions and the International Monetary Fund, it added.
The NOP limit has been raised to the lower of 25 percent of qualifying capital or $150 million, from the previous limit of 20 percent of unimpaired capital or $50 million, whichever is lower. A bank's NOP represents the amount of its net assets and/or liabilities denominated in foreign currency.
The BSP increased the oversold and overbought limit to 20 percent of unimpaired capital in 2007, at the height of the global financial crisis. Before 2007, the overbought position has an absolute limit of 2.5 percent while banks’ oversold position has no ceiling.