MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) reported yesterday that the volume of derivatives handled by banks went up by 65 percent to P3 trillion in 2009 as the industry posted ample capital buffer to take additional risks amid volatilities in foreign exchange and interest rate fluctuations.
Data showed that the notional value of derivatives instruments reached almost P3 trillion last year or P1.187 trillion more than the P1.812 trillion registered in 2008.
“The substantial year-on-year increase took place as banks with ample capital buffer became more comfortable to take on additional risks from these types of intruments in the midst of volatilities in foreign exchange and interest rates,” the BSP said.
The Philippine banks invested in derivatives instruments such as foreign exchange contracts that cornered 81.7 percent of the total funds while interest rate contracts accounted for the remaining 18.3 percent.
Foreign exchange contracts consisting mainly of foreign currency forwards jumped by 83.5 percent to P2.448 trillion last year from P1.334 trillion in 2008 while interest rate contracts including interest rate swaps and over-the-counter interest rate options increased by 19.7 percent to P549.1 billion from P459 billion.
Derivatives are financial instruments that derive their value from the performance of an underlying variable, such as interest rates, foreign exchange rates or financial instrument prices.
The derivative instruments are usually available to exporters and importers to protect their businesses from the appreciation or depreciation of the peso against the dollar.
The trading of derivatives instruments is currently limited to banks but the BSP has lifted the level of risks assumed by an authorized bank or the scope of its derivatives activities.
As early as the 1990s, the central bank issued the first rules governing derivatives transactions that allowed banks that meet the set criteria to engage in derivatives transactions.
The central bank’s Monetary Board had consistently liberalized the rules governing the trading of derivatives instruments.
It recently opened up derivatives trading to more players by allowing banks more control over their financial risk management and investment diversification.
The new circular issued by the BSP late last year was part of the second wave of capital flow liberalization to further develop the financial markets, to allow the BSP more flexibility in managing monetary aggregates, and to allow investors to look for more opportunities to invest.
The first wave of foreign exchange (FX) liberalization was implemented early last year that increased the dollar overbought positions and limiting oversold positions of banks.