Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said Tuesday, April 25, that the peso-US dollar exchange rate is stabilizing at the P54-P55 level.

To make sure it will continue to be on steady spot market rates, he said the BSP has decided to streamline and expand the currency rate risk protection program (CRPP) which was reported earlier.

"The lessons from last year’s weakness in the peso show that spillover of risks is inevitable in an increasingly global and interconnected world. Hence as the peso stabilizes, we find this an opportune time to strengthen Filipino resilience,” said Medalla.

He added that the CRPP “had to be revamped to increase its availability to banking clients.”

“We did this by streamlining and easing the requirements and expanding the coverage of eligible FX (foreign exchange) transactions,” he also said.

As explained by the BSP, the CRPP facility is a tool to effectively manage foreign currency exposures when there is exchange rate volatility. It allows the clients of the country’s big banks to hedge their eligible foreign currency obligations and transactions through non-deliverable forwards or NDF.

The big banks, or the universal and commercial banks, will transact directly transact with the BSP for bank clients who wish to avail of the CRPP, and only net payments will be settled by BSP or the counterparty bank at the maturity of the contract.

The use of this hedging facility will help ease the peso-US dollar spot market pressures.

As reported earlier, the BSP revised the CRPP by aligning the documentary requirements with the existing regulations on foreign exchange transactions. It has also removed notarial rules for an “expeditious applications.”

Meanwhile, foreign exchange obligations and transactions eligible for the facility now includes non-trade transactions and investments from the original trade-related coverage. And, since the LIBOR benchmark is no longer in use, the BSP has changed the applicable US dollar interest rate in the computation of the NDF.

Basically, the CRPP ensures corporate borrowers with substantial foreign exchange exposures will have a steady supply of US dollar when needed.

The CRPP was first introduced during the 1997 Asian Financial Crisis and was reactivated in 2018. 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.

Based on Circular No. 1172, which was signed by BSP Deputy Governor Chuchi G. Fonacier on April 18 and released on 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 pretermination 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.

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.

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.

On Tuesday, the peso opened strong at P55.65 versus Monday’s closing of P55.77.