The Bangko Sentral ng Pilipinas (BSP) has issued the amended foreign currency deposit system regulations to make it more flexible by updating banks’ risk management and business practices.

It is the second phase of amendments for its foreign currency (FX) policy. The first phase of reforms was done May 2020 which covered banks’ management of FX exposures.

BSP Circular No. 1134, which was signed by BSP Governor Benjamin E. Diokno last Tuesday, Dec. 28, amended the requirements on foreign currency deposit unit (FCDU) transactions for better monitoring and adoption of risk controls.

Diokno said on Thursday, Dec. 30, that the reforms “will afford banks the opportunity to perform efficient and flexible liquidity cash management of FX denominated funds by easing the stringent conditions on lending to regular banking unit (RBU) by the E/FCDU (Expanded FCDU).”

“In view of the liberalized FX regulatory environment, banks are expected to put in place an appropriate risk management system and integrate the same into the overall risk management process to ensure that material risks arising from FX denominated transactions are properly identified, measured, monitored, and controlled,” said Diokno.

Basically, the BSP said the amended regulations expanded the coverage of entities that are authorized to engage in FX transactions such as Islamic banks and digital banks. The new circular also streamlined the related licensing requirements for banks applying for the FCDU authority.

“Previously, all banks are required to seek the prior approval of the BSP before they can engage in Expanded/FCDU transactions. With the second phase amendments, covered banks will only have to notify the BSP of their intention to engage in Expanded/FCDU operations. They are, however, expected to comply with the standards and requirements of the E/FCDU license on a continuing basis,” said the BSP.

The new rules also rationalize the prescriptive requirements for certain E/FCDU transactions such as foreign currency derivatives activities and securities transactions following the relevant provisions in the Manual of Regulations for Banks to ensure consistency in the implementation and enforcement of guidelines, said the BSP.

Under the circular, Islamic banks, digital banks, as well as universal banks, commercial banks and thrift banks can undertake E/FCDU activity under a Type C license.

FCDUs are local units of banks that are permitted to engage in foreign currency transactions including foreign currency deposits. There are 76 banks with FCDU authority, of which 43 are universal and commercial banks. The rest are thrift banks and rural and cooperative banks.

Banks with both E/FCDU and FCDU authority are allowed to engage in foreign currency-foreign currency swap, and in foreign exchange trading. They can also – with prior BSP approval -- engage in financial futures and options trading.

As of end June this year, FCDU loans totalled $16.2 billion, down 10 percent from $18 billion same time last year. FCDU deposit liabilities also reached $45.6 billion, up by 2.6 percent from end-March of $44.5 billion. On a year-on-year basis, it increased by 4.8 percent from $43.6 billion.