BSP to issue stricter rules on hedge deals

This month, the Bangko Sentral ng Pilipinas (BSP) will issue stricter rules on hedging instruments, particularly non-deliverable forwards (NDFs), to control liquidity amid the strong foreign capital inflow and to minimize market risks, the BSP said. The rules will come in the form of a circular on NDFs after the BSP conducts a series of consultations with major players in the banking industry, BSP governor Amando Tetangco Jr. said Wednesday. NDFs refer to forward contracts between two parties to buy or sell an asset such as foreign exchange for an agreed price and for future settlement. Upon maturity, counterparties are supposed to settle the difference between the spot price and the contracted NDF price. Bank reports submitted to the BSP showed that NDFs serve as hedging instruments and as tools for speculation, prompting the bank regulator to come up with stricter rules on the instrument. In Memorandum No. M-2011-28, the BSP required banks to report their NDF transactions daily, instead of weekly. This will allow the BSP to closely monitor the NDF market and to curb volatility in the peso-dollar exchange rate, the BSP said. So that banks will have to set aside more capital to cover their NDF exposure, the proposed circular seeks to raise the current market risk weight of 10 percent. Initially, the BSP is considering to raise the risk weight to about 187.5 percent. “That is not a firm figure. We never do anything arbitrary," Tetangco said. Banks agree to cut NDFs Earlier, banks reached an agreement to cut their NDF volumes by 20 percent as transactions shot up late in 2010 until early 2011, with the bulk of these being speculative and resulting in an increased peso volatility. The net inflow of foreign portfolio investments or hot money rose by 230 percent to $3.06 billion in the first eight months of the year from $925.96 million in the same period last year, based on latest data released by the BSP. This was after foreign capital continued to flood emerging market economies, including the Philippines — albeit at a slower pace over the past few weeks. Meanwhile, the gross inflow of hot money more than doubled to $11.834 billion in the first eight months of 2011 from $5.766 billion in the same period last year, while outflows jumped 81.3 percent to $8.776 billion from $4.84 billion. Still in the first eight months of the year, major sources of hot money included Singapore, the United Kingdom, the United States, Luxembourg, and Hong Kong. Through excessive liquidity in the financial system, strong capital inflows could stoke up inflation. To keep inflation expectations well-anchored, the BSP’s Monetary Board, as a preemptive move, raised interest rates by 25 basis points last March 24, and by another 25 basis points last May 5 due to the continued build-up in inflation pressures due to the escalating prices of oil and food in the world market. This has brought the overnight borrowing rate to 4.5 percent, and the overnight lending rate to 6.5 percent. — PE/VS, GMA News