BSP, banks to curb forex volatility

MANILA, Philippines - Banks operating in the country are closely coordinating with the Bangko Sentral ng Pilipinas (BSP) to curb volatility in the peso-dollar exchange rate amid the strong inflow of foreign capital into emerging market economies, including the Philippines, through the imposition of stricter rules on hedging instruments.

Bankers Association of the Philippines (BAP) president Aurelio Montinola III said in an interview with reporters that banks continue to service the need of their clients particularly on non-deliverable forwards (NDFs) to finance their foreign exchange requirements.

“You know the banks have always been working in the best interest of the economy so the important thing is that banks help finance what we call the flows. It’s a legitimate need for clients to try to also minimize the volatility in their transactions by having the traditional ways like forward contract,” Montinola stressed.

An NDF is a forward contract between two parties to buy or sell an asset such as foreign exchange for an agreed price and settlement in the future. Counterparties settle the difference between the contracted NDF price and the spot price upon maturity.

However, NDFs are used as an hedging instrument but also for speculation.

He pointed out that banks continue to discourage anything that is on the speculative side.

“So the banks have been very helpful in that area. The banking sector has always cooperated. What we do is we take care of the needs of our clients and we take care of, if there is a need for people to have trade financing and things like that, requests for loans for expansion,” he added.

Montinola explained that banks would continue to assist in the financing of legitimate flows and would never participate in speculative flows.

“As a policy matter all the banks agree that they will assist in the financing of legitimate flows and they will not participate in speculative flows. I think people should be aware that the last thing we need in the country is a speculative attack on anything,” he stressed.

He cited the case in Europe where speculators are getting involved

“Instead of focusing on the fundamentals people are worrying about one currency or the other and so the speculators are getting involved in Europe. That’s the last thing we want and definitely the banks here don’t want to be a party with that,” he said.

The BSP is set to impose stricter rules on NDF after the bank regulator discovered that the derivatives were being used for purposes other than legitimate hedging.

The BSP is consulting with banks for the imposition of stricter rules on NDFs taking into consideration the requirements under the international Basel Accord.

“Parallel to this effort, we are reviewing prudential limits in consonance with the overall reform in the international regulatory standards for capital and liquidity,” BSP Governor Amando Tetangco Jr. said in his keynote address at the third Corporate Treasury and CFO Summit.

The BSP through Memorandum Number M-2011- 28 has required banks to report their NDF transactions daily instead of weekly starting last June 1 to closely monitor the NDF market and curb volatility in the peso-dollar exchange rate.

“Based on these new reports, we have seen that significant flows into the foreign exchange market have been of the speculative nature. We are now working with the banks to come up with market-based solutions to arrest these speculative flows and ensure that market conduct is orderly at all times,” he added. 

The BSP chief pointed out that the movement of the peso against the dollar has been consistent with that of other currencies in the region and continued to be competitive compared to other currencies.

“The country’s fundamentals support the peso. And the BSP, as a matter of policy, will not go against the fundamental trend. What BSP is mindful of, however, is that the volatilities in the exchange rate movements are not excessive,” he said.

According to him, a stable exchange rate would help businesses and consumers plan better.

The peso has strengthened a little over three percent to 42.475 to $1 the other day from 43.84 last Dec. 31.

The BSP believes that the decision of the US Federal Reserve to likely keep benchmark interest rates at a record low of near zero at least through mid-2013 would give authorities enough monetary space to address the projected surge in foreign capital flows to emerging market economies including the Philippines.

“This implies the direction of capital flows could continue in favor of emerging market economies once the current risk off market mindset dissipitates. Even as the surge in flows could continue to complicate monetary policy, the specific timeframe provided by the Fed gives us monetary policy space,” Tetangco said earlier.