Philippines: Dollar-hedging facility rules tweaked by BSP

MONETARY authorities have approved operational amendments and expanded the coverage of a dollar-hedging facility in a bid to ease pressures in the foreign exchange (FX) spot market.

“The lessons from last year’s weakness in the peso show that spillover of risks is inevitable in an increasingly global and interconnected world,” Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said in a statement on Tuesday.

The changes involve the BSP’s Currency Rate Risk Protection Program (CRPP), under which bank clients looking to limit risks from eligible foreign exchange obligations enter into non-deliverable forward (NDF) contracts with the central bank.

The NDF deals allow bank clients to lock in a peso-dollar rate for up to three months. The covered obligation should not be lower than $50,000 and only the net difference between the contracted forward rate, and the prevailing spot rate is settled in pesos upon maturity.

The peso fell to a record low of P59 versus the dollar in October last year, a showing blamed on factors such as aggressive interest rate hikes by the US Federal Reserve, concerns over the impact of the Russia-Ukraine war and the imposition of tighter pandemic restrictions in China.

With the peso now stabilizing, Medalla said “we find this an opportune time to strengthen Filipino resilience.”

“The CRPP had to be revamped to increase its availability to banking clients,” he added.

Documentary requirements were aligned with existing FX regulations and notarial rules have also been removed to facilitate applications.

“Further, FX obligations and transactions eligible for the CRPP Facility have been expanded to include non-trade transactions and investments from the original trade-related coverage,” the central bank said.

The list of eligible transactions now comprise:

– BSP-approved, -registered or -reported private sector/public sector/publicly guaranteed private sector foreign currency loans/borrowings;

– Foreign merchandise trade transactions compliant with the Manual of Regulations on Foreign Exchange Transactions (FX Manual);

– Non-trade current account and resident-to-resident FX transactions compliant with the FX Manual; and

– Outward investments that are also compliant with the FX Manual.

Other changes involve the applicable dollar interest rate to be used in the computation of the NDF rate following the cessation of the London Interbank Offered Rate benchmark, the removal of the 1 p.m. to 2 p.m. trading window and a change in the maximum tenor.

Bank clients wanting to avail of the CRRP can do so via their respective universal and commercial banks, which will then transact directly with the BSP.

The changes to the CRRP facility were detailed in BSP Circular 1172 dated April 18, 2023.