For Philippine companies with obligations in U.S. dollars or euros, hedging against foreign exchange volatility is critical. When the peso swings sharply, it can mean the difference between staying solvent and going under.
One of the most common tools for managing this risk is the non-deliverable forward (NDF), a type of derivative contract where two parties agree to settle the difference between a contracted exchange rate and the actual rate at maturity, without exchanging the underlying currencies. These contracts are typically used in countries where capital controls or operational constraints make it difficult to trade or deliver foreign currency freely.
The BSP requires that NDFs involving a Philippine resident be settled exclusively in pesos. That means the resident cannot receive or deliver dollars, euros, or any foreign currency when the contract matures, only pesos.
Now, the BSP is proposing to go further. A new BSP circular recently released extends this peso-settlement rule to other non-deliverable FX derivatives, including non-deliverable swaps and cross-currency swaps. In practice, this could upend how foreign counterparties do business with Philippine residents.
Here’s the problem: most foreign institutions do not maintain peso accounts in the Philippines, and they have no operational reason to. Their treasury functions are centralized overseas. Under the new rule, however, they would need to find a way to settle their obligations in pesos, even though they are offshore entities transacting from abroad.
This creates a major operational headache. There’s no clear framework for how a foreign counterparty can easily disburse PHP to a Philippine client without opening local accounts or appointing a peso-paying agent.
The BSP’s intent is understandable: to avoid unmonitored foreign exchange flows and ensure local control over peso liquidity. But forcing all settlements into pesos creates unnecessary friction.
Instead of making the market safer, this policy could discourage reputable foreign institutions from entering into hedging transactions with Philippine firms. These are the same firms that rely on NDFs and their variants to manage dollar exposures. Cutting them off or making access harder drives up their costs and exposes them to unnecessary FX risk.
Until then, mandating peso settlement for all non-deliverable derivatives—no matter how well-intentioned—risks pushing the market away rather than drawing it in.
Let’s hope the BSP reconsiders.
Russell Stanley Geronimo is the founder and head of Geronimo Law. He regularly advises foreign clients on derivatives and cross-border financial transactions.
