Banks to exercise ‘restraint’ in offshore forex trades

MANILA, Philippines—Philippine commercial banks have agreed to exercise “voluntary restraint” in offshore foreign-exchange trades that cause volatility in the peso-dollar exchange rate and complicate monetary management.

Banking sources told the Inquirer that the Bangko Sentral ng Pilipinas (BSP) recently called the attention of the commercial banking sector as it noticed that some players might be over-engaging in foreign exchange non-deliverable forwards (NDFs). Whether for their own account or acting on behalf of some big local corporations, some banks were suspected of over-buying NDFs from offshore markets and selling them locally, thereby negating the BSP’s efforts to temper the volatility of the peso against the dollar.

Aurelio Montinola III, president of the Bankers Association of the Philippines, said the banks were now cooperating with regulators to address such concerns on excessive NDF trades.

“There has been some internal discussion within BAP. I think the best way to say is there’s a voluntary restraint to keep [NDFs] at existing levels,” said Montinola, who is also president of the Bank of the Philippine Islands.

A foreign exchange forward contract refers 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.

Banking sources said the BSP recently noticed an unusual surge in NDF trades by some banks in offshore markets like Singapore, Hong Kong and London. These trades are putting a lot of pressure for the peso to appreciate rapidly, which in turn is seen as detrimental to the BSP’s efforts to temper volatility. Whenever the local currency is appreciating too fast against the dollar, exporters and households supported by overseas Filipino workers are hit hardest.

This, in turn, prevents the BSP from siphoning off excess cash in the system through foreign exchange swaps, which are used to lock up excess foreign exchange that monetary authorities did not want to book outright as part of the country’s gross international reserves, said a bank treasurer who spoke on condition of anonymity.