Central Bank of Philippines shielding speculation in the Peso

The central bank said on Friday it has increased banks' capital provisions for non-deliverable forward (NDFs) positions, a move aimed

The central bank said on Friday it has increased banks’ capital provisions for non-deliverable forward (NDFs) positions, a move aimed at tackling speculation that heightens volatility in the foreign exchange market. 

Authorities have expressed concern that the rising volume of the offshore dollar-based derivatives may be used for currency speculation, although they acknowledge that there were groups with legitimate hedging needs.

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The new rules, which take effect on January 1, 2012, assigns a higher market risk weight on NDFs equivalent to a capital adequacy ratio of 15% from the current 10%, the Bangko Sentral  Pilipinas (BSP) said in a statement.

“The latest move by the Monetary Board is a pre-emptive measure signaling against those using NDFs for speculative purposes which could be destabilizing should market conditions reverse quickly,” the BSP said.

“We are cognizant that speculators have been attracted to NDFs as a money market instrument and for that reason, we need to put in place pro-active and prudential measures,” BSP Governor Amando Tetangco said in the same statement.

The rise in NDF volumes early this year was partly due to strong fund inflows as investors moved away from developed economies in search of higher yields in emerging markets.

Earlier this year, banks had agreed to voluntarily limit their net open NDF positions, but Tetangco said regulators had to do more to ensure that activities in the NDF market do not lead to higher system wide risks.

Some local bankers earlier said the central bank had initially asked banks to cut their NDF volumes by 20% and then later by a total 50%.

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Central bank data showed that NDF volumes have been on the rise but outright forward transactions were declining, reinforcing the view that “there is more to NDF activity that just an intention to hedge,” the central bank statement said.

“With market trends still vulnerable to the ongoing macro-financial difficulties in Europe and in the United States, NDF exposures pose heightened market risk from the market’s volatility,” it said.

In May, the central bank ordered banks and trust firms to submit reports on their NDF transactions daily instead of weekly for better monitoring of NDF volumes.

“The gains and losses from trades are a private matter between counterparties,” Tetangco said.

“But these gains and losses have consequences on market volatility, difficulties in closing out forex liabilities and even the safety and soundness of banks, among others. These are definitely issues of public policy and regulatory oversight.”

The peso hit a seven-week high against the dollar on Friday following long-awaited measures announced by euro zone leaders to resolve the European debt crisis.

The central bank is also expected to release soon more measures to liberalise the current foreign exchange regime to help dampen peso volatility.

Philippines is developing its capital markets and trades are now moving electronic. The Philippine Stock Exchange has been actively promoting online trading both to brokers and investors and in 2010, online accounts of investors registered a 25.8 percent growth to 35,559 from the previous 28,261. Online trades represented 16.3 percent of the total number of stock market transactions in 2010.

Online Forex trading is still under the carpet, established brokers e.g. Millenium (Indonesia) have a physical presence along with a few locals who act as introducing brokers to international firms, with the rise of online trading in stocks FX and CFD’s will be on the rise.

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