The Bangko Sentral ng Pilipinas (BSP) has updated and enhanced its Currency Rate Risk Protection Program (CRPP) to strengthen the peso vis-à-vis the US dollar and ensure corporate borrowers with substantial foreign exchange exposures of US dollar supply.

The CRPP, first introduced during the 1997 Asian Financial Crisis and reactivated in 2018, allowed bank clients to hedge their eligible foreign currency transactions and obligations. The facility is a non-deliverable US dollar-peso forward contract or NDF between the BSP and the big banks. The facility also helps ease demand pressures in the foreign exchange spot market.

Based on Circular No. 1172, which was signed by BSP Deputy Governor Chuchi G. Fonacier on April 18 and released on Friday, April 19, the CRPP guidelines were updated but still retained the $50,000 current and outstanding minimum for hedging with a maximum tenor of three months or 90 days.

The revisions included the facility coverage, the mechanics for interested banks, supervisory enforcement actions, documentary requirements, tenors, pricing, and pre-termination of the hedging contract.

The BSP expanded its coverage of transactions with payments, settlement, or maturity that will be considered eligible foreign exchange activities under the CRPP.

These are: BSP-approved/registered/reported private sector/public sector/publicly-guaranteed private sector foreign currency loans/borrowings; foreign merchandise trade transactions that are duly compliant with relevant provisions, including documentary requirements, stipulated under the Manual of Regulations on Foreign Exchange Transactions; non-trade current account and resident to resident foreign exchange transactions that are duly compliant with relevant provisions, including documentary requirements; and outward investments that are duly compliant with relevant provisions.

In the previous circular, obligations and transactions allowed were short-term or ST trade-related loans from eligible banks; medium/long-term trade-related foreign currency deposit unit loans with payments maturing within 90 days as of date of application; ST trade-related borrowings of oil companies from offshore banking units; and US dollar trust receipts, among others.

In an NDF contract, only the net difference between the contracted forward rate and the spot rate will be settled in pesos upon maturity of the contract. The new circular added that “should the eligible obligation/transaction be denominated in a foreign currency other than the US dollar, the CRPP contract shall be denominated in the US dollar equivalent using the exchange rate” based on the BSP reference exchange rate.

Fonacier in the circular memo said to facilitate the transactions under the CRPP, the BSP has various regulatory relief measures such as exposures under the CRPP facility will not be subject to NDF position limits and reduced market risk capital charges.

The maximum tenor of the CRPP contracts is still three months but not to exceed the remaining tenor of the underlying foreign exchange obligation and transaction. “At the expiration of the contract, the qualified applicant has the option to re-avail the CRPP facility for the remaining eligible unpaid FX (foreign exchange) obligation/transaction (e.g., interest or principal amortization). A new application and supporting documents are required for each CRPP re-availment,” according to the circular.

The BSP continues to remind banks that the CRPP comes with significant benefits but there are also various risks such as adverse or unanticipated market, financial, or political developments. Some of the risks are counterparty including but not limited to risk of default and settlement risk, other credit and enforcement risks, risk of illiquidity and related risks, and operational risks.

The peso-US dollar exchange rate has been extremely volatile from June to October last year since the US Federal Reserve’s aggressive jumbo rate hikes led to a strong greenback.

The peso has some stability in the last part of 2022 due to inflows and BSP’s similar aggressive tightening to curb high inflation. From a record low of P59 in September and October, the peso has been trading between P55 and P56 recently.

In view of a depreciating peso, the BSP has had to revise the CRPP mechanics and pricing while documentation requirements were simplified.

Aside from the streamlining of the documentary and reportorial requirements in the approval processes of the CRPP facility, the BSP added regulatory relief as incentives for big banks to avail themselves of the facility.

In theory, the central bank never really deactivated the CRPP. It was only inactive because the exchange rate was less volatile and the peso was stable before June 2022 when it started its rapid depreciation from P52 to P59.