The Bangko Sentral ng Pilipinas said it was closely watching trading activities in the foreign exchange market in the wake of the significant appreciation of the peso to determine whether banks were engaging in speculative activities.
The BSP said it was also reviewing the rules on trading of non-deliverable forwards (NDFs) to see if these could be tightened further to discourage banks from engaging in peso speculation.
“We are monitoring price action and market behavior to determine unusual activity,” BSP Governor Amando Tetangco Jr. said Wednesday. “We have to see if additional measures are needed to make sure that foreign exchange transactions are conducted basically to meet legitimate [rather than speculative] requirements.”
An NDF is a hedging tool that allows holders to buy a currency at a specified exchange rate and time in the future. This is meant to help shield businesses, mainly importers, from losses resulting from foreign exchange volatility.
Regulators, however, said there was a possibility that banks were trading NDFs not only to meet the hedging needs of their corporate clients but also to earn from peso speculation. The BSP prohibits speculative activities as these create sharp and sudden volatility in the exchange rate that could harm businesses and the economy.
At the start of the year, the central bank imposed a higher capital charge on NDF holdings of banks. Now, banks are required to set aside an amount equivalent to a 15-percent capital adequacy ratio (CAR), from the previous 10 percent, for their NDF holdings. But Tetangco hinted there might be a need to raise this further.
The peso has strengthened back to the 41-to-a-dollar territory this month, closing at a four-year high of 41.72:$1 on Tuesday.
Tetangco said legitimate demand by foreign fund owners for peso-denominated assets has indeed risen because of the favorable economic performance of the country.