Recent swings in the peso-dollar exchange on currency spot market have prompted the central bank, Bangko Sentral ng Pilipinas (BSP), to take a closer look into banks? currency deals with overseas investors.

The BSP recently required banks to report their non-deliverable forward (NDF) transactions with offshore investors on a weekly basis, including the agreed exchange rate, volume and the maturity of transactions.

According to the Organization for Economic Cooperation and Development (OECD), an NDF contract is a foreign-currency financial derivative instrument. An NDF differs from a normal foreign-currency forward contract in that there is no physical settlement of two currencies at maturity. Rather, based on the movement of two currencies, a net cash settlement will be made by one party to the other, OECD explained.

As the new measure coincided with the peso?s weakening trend against the US dollar, there have been speculations in the market that this could be a prelude to the central bank?s eventual move to cap NDF deals by instructing banks to include such transactions in the computation of allowable foreign exchange stock or overbought limit.

In an e-mail last Friday, BSP Governor Amando Tetangco Jr. said NDF transactions could indicate ?the level of risk appetite of investors for emerging markets such as the Philippines.?

?These transactions could cause volatility in the spot onshore market,? Tetangco explained. ?For these reasons, BSP needs to monitor these flows closely. Hence, the clarification of our reportorial requirements in our latest issuance.?

Tetangco did not comment on whether the NDFs could soon be included in the overbought limit.

The peso closed Friday at 44.135 to the dollar. (Monday was a non-working holiday.) Since the start of the year, it has lost 6.6 percent. Last year, it rose by nearly 19 percent against the dollar.

Some banks estimate the outstanding peso-dollar NDFs between banks and offshore parties at $6 billion. Others say some banks would exceed the overbought limit of 20 percent of unimpaired assets if these NDFs were included in the computations.

Currency forwards refer to agreements to buy or sell specified amount of goods to be settled at a specified rate in the future.

In the case of NDFs, which played a big role in the sharp currency swings during the Asian financial crisis, only the exchange rate differential is settled upon maturity.

At present, NDF positions are reported as a lump sum, as part of capital adequacy requirements that banks must comply with.