MANILA, Philippines—Speculative activities in the country’s foreign exchange market have dropped substantially from the peak in 2010 following the implementation of tough anti-speculation measures, the Bangko Sentral ng Pilipinas said.
BSP Governor Amando Tetangco Jr. told reporters on Friday that the outstanding value of transactions involving non-deliverable forwards (NDFs) had fallen from $15 billion in 2010 to just $3 billion to date.
NDFs are hedging instruments meant to shield firms from foreign-exchange risks, but are believed to be traded by some banks to generate income from currency speculation. Trading on speculations that the peso would be strengthening was believed to have partly caused the peso’s appreciation trend since 2009.
“I believe market players have heeded the call for prudence. The latest level of outstanding NDF transactions is now about a fifth of the level in 2010, which hit $15 billion,” Tetangco said.
Although the central bank was not biased for or against a strong peso, Tetangco said the BSP wanted to help keep the exchange rate volatility to a minimum.
He said keeping the exchange rate volatility to a minimum would enable the country to avoid the destabilizing effects of sharp and sudden foreign exchange fluctuations.
As such, he said, the BSP was keen on minimizing speculative activities in the foreign exchange market that could trigger excessive exchange rate volatility.
In January last year, the BSP raised the required capital to cover for the banks’ exposure to NDFs.
In December, the central bank announced the setting of caps on NDF holdings of banks. In particular, the BSP rules limited the domestic banks’ exposure to NDFs an amount equivalent to 20 percent of their capital. It also limited foreign banks’ exposure to the same to an amount equivalent to or less than 100 percent of their capital.
“The guidelines on establishing the caps are still being refined to ensure that all the statutory requirements are met before the guidelines are released. But these are forthcoming,” Tetangco said.
The peso closed at 41.05 to the US dollar in the last trading day of 2012. This marked a 7-percent year-to-date appreciation of the peso, making it one of the fastest-rising currencies against the dollar last year.
Market players said the peso could have been stronger against the US dollar had it not for the occasional intervention of the BSP in the market.