The Bangko Sentral ng Pilipinas (BSP) is proposing to amend rules on foreign exchange (FX) derivatives transactions involving the peso and in the open FX position of banks.
FX derivatives are derivatives that involve the buying or selling of foreign currency against the Philippine peso and includes transactions such as forward FX contract which refers to an agreement for delayed delivery of a foreign currency in which the buyer agrees to purchase and the seller agrees to deliver at a specified future date a specified amount at a specified exchange rate, said the BSP.
Based on the draft circular, which will have a transitory period once approved of until March 2025 for some transactions, the BSP is amending the related FX regulations to make it consistent with the previous changes to FX rules.
The updates on FX regulations are also aligned with the BSP policy of supporting the “deepening of the Philippine financial markets.”
The proposed circular said that customers – in dealing with FX transactions involving the peso – will be allowed to hedge their FX exposures through FX derivatives with authorized agent banks (AABs) if the “sale of FX through FX derivatives may only be made when the underlying transaction is eligible for servicing using FX resources of AABs/AAB forex corps.”
“AABs may only engage in FX derivatives transactions with customers if the latter is hedging FX exposure or covering funding requirements,” said the BSP, but the total notional amount of the FX derivatives transactions will not exceed the amount of the underlying FX exposure at any given point in time.
The draft circular also included the following: customers will no longer be allowed to purchase FX from AABs/AAB forex corps for FX exposures that are fully covered by deliverable FX derivatives; and if a customer preterminates a non-deliverable FX derivatives contract, it cannot re-enter into another non-deliverable FX derivatives contract for the same underlying transaction unless there is a change in the original terms of the underlying transaction.
The BSP said that FX derivatives in peso would also mean that: FX derivatives transactions of AABs for their own account will be governed by the BSP’s existing rules; AABs authorized by the BSP to transact in non-deliverable forwards and non-deliverable swaps will ensure that these products are not used for speculative purposes; and AABs will not be required to submit the documentary requirements when hedging their own transactions.
The BSP also made changes to the open FX position of banks to make it consistent with previous amendments.
The draft circular has a feedback deadline of July 12 for banks’ suggestions and comments.
Last month, the BSP has revised the regulations on the derivatives transactions of banks, quasi-banks and trust corporations relating to authorized activities and those that will require additional notification to the BSP.
Based on the approved Circular No. 1194, derivatives activities affected by the revised circular are credit default swaps, credit derivative, credit-linked note, forward rate agreement, FX option, FX swaps, non-deliverable swaps, structured products, ROP’s paired warrant programs and total return swap.
The circular also revised activities requiring notification for banks and its trust department, as well as a quasi-bank and its trust units.