BSP tightens monitoring of banks' forex transactions

Manila, Philippines - The Bangko Sentral ng Pilipinas (BSP) has tightened its monitoring of the currency deals of banks and trust firms with offshore investors to curb excessive volatility in the foreign exchange market.

BSP Deputy Governor Nestor Espenilla Jr. has issued Memorandum Circular 28 directing banks and trust firms to submit non-deliverable forward (NDF) reports to the BSP Supervisory Data Center daily, instead of weekly.

Espenilla said the new rules on the submission of NDF reports took effect last June 1.

He pointed out that banks that fail to submit or file erroneous reports would be penalized accordingly.

Foreign exchange forward contracts refer to an agreement to buy or sell foreign exchange at a specified price but for delivery and payment in the future. In the case of NDFs, only the price differential is settled upon maturity.

BSP Governor Amando Tetangco Jr. said they issued the new regulation as part of efforts to better understand the NDF market.

“We want to better understand the NDF market in terms of the size, direction, and timing of transactions while maintaining a liberal policy framework,” he said.

In June 2008, the BSP directed banks to submit NDF reports on a weekly basis due to wild swings in the peso-dollar exchange on the currency spot market.

Regulators are closely monitoring offshore foreign exchange trades as these cause volatility in the peso-dollar exchange rate and at the same time complicate monetary management.

A surge in NDF trades by some banks in offshore markets could put a lot of pressure for the peso to appreciate strongly against the US dollar.

The peso has so far appreciated to 43.291 to $1 as of end-May, from the end-December level of 43.885 to $1.

The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. It also aims to promote and preserve monetary stability and the convertibility of the national currency.

The BSP provides policy directions in the areas of money, banking and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions.

Under the New Central Bank Act, the BSP performs liquidity management, currency issue, financial supervision, management of foreign currency reserves, and determination of exchange rate policy.