The central bank has ordered lenders to halt the use of non-deliverable foreign-exchange derivatives for speculative bets on the local currency, stepping up efforts to curb artificial volatility after loosening rules last year.

Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. clarified the boundaries of currency trading in a memorandum issued on June 3. The directive aims to ensure that previous market liberalization does not undermine the stability of the Philippine peso.

The move follows the implementation of Circular No. 1212 in April last year, which originally amended forex regulations to “broaden access to forex hedging instruments and enhance banks’ ability to service customer requirements and transact in forex derivatives for their own account.”

Non-deliverable foreign exchange (NDF) contracts are cash-settled derivatives used to hedge or speculate on currency movements. Unlike traditional contracts, they do not involve the physical delivery of the restricted currency at maturity. While the BSP initially intended to create a more flexible financial environment, it is now emphasizing that this flexibility must not be abused for pure profit-seeking at the expense of the peso's stability.

To that end, the central bank noted that the manual governing these transactions requires Authorized Agent Banks (AABs) "to ensure that such instruments are used strictly for legitimate economic purposes.”

The BSP is specifically targeting non-deliverable forex derivatives transactions involving the sale of forex against the peso by local banks to non-resident financial institutions (FIs). Under the updated guidance, these deals “shall have underlying economic purposes, such as hedging of their own investments.”

By contrast, the BSP is taking a hard line against trades that lack a clear economic foundation. Any transaction “that is not supported by specific, identifiable underlying exposures and documentation, particularly those for speculative positioning, directional peso exposure, or arbitrage-driven activities, [is] not allowed.”

This crackdown on speculation signals the BSP’s intent to curb “arbitrage-driven” activities that can create artificial pressure on the local currency. To enforce the mandate, the BSP expects banks to prove the legitimacy of every trade.

“AABs are expected to maintain adequate internal controls, governance processes, and audit trails, including the necessary supporting documents, to ensure compliance,” the BSP said.