Dollar hedging rules eased to cushion peso decline

The central bank has relaxed requirements for financial institutions to avail of a dollar hedging facility in a bid to ease the selling pressure on the peso.

According to the Bangko Sentral ng Pilipinas (BSP), the banks’ hedging contracts under the Currency Risk Protection Program (CRPP) will be exempt from caps on the amount of dollar forward deals that these firms are allowed to hold.

This hedging scheme was created in the wake of the 1997 East Asian financial crisis, but was used extensively during the country’s political and economic difficulties during the Estrada administration in 2000.

The BSP reactivated the CRPP last week amid heavy selling pressures on the peso, which pushed the local currency to its lowest level in almost 13 years.

According to regulators, banks carrying these non-deliverable forwards will also be required to allocate less capital to back up the risk associated with carrying these contracts in their books.

Finally, the central bank also sought to streamline the process of availing of the hedging facility, requiring less documentation from financial institutions.

In particular, universal banks and commercial banks would no longer need additional derivatives authority since “transactions under the CRPP are considered generally authorized derivatives activities,” the BSP said in a press statement.

“The terms, conditions and the reporting requirements of the CRPP facility will be covered by a separate issuance on the implementing guidelines,” the central bank added.

These relaxed measures were approved by the Monetary Board last week, and aimed at easing the demand pressures in the foreign exchange spot market.

The CRPP is a non-deliverable dollar-to-peso forward contract between the BSP and the bank. In this contract, only the net difference between the contracted forward rate and the spot rate shall be settled in pesos upon maturity of the contract.

Obligations eligible under the CRPP facility are the unhedged foreign currency obligations in amounts of not less than $50,000 that are current and outstanding as of the date of application.

These include the following: BSP-reported or -registered short-term trade-related loans from eligible banks; medium- or long-term trade-related loans with payments maturing within 90 days as of date of application; short-term trade-related borrowings of oil companies from offshore banking units; and US dollar trust receipts, among others.

The maximum tenor of the CRPP contract is 90 days with a reavailment option.