MANILA, Philippines – The Monetary Board has approved amendments to regulations that allow qualified thrift banks to deal in deliverable foreign exchange (FX) forwards, the Bangko Sentral ng Pilipinas (BSP) said on Wednesday, November 26.
An FX forward is a type of foreign exchange transaction where there is an agreement to buy one currency against the delivery of another currency at a rate set on the trade date, for settlement on a future, specified date. If it is a deliverable FX forward, the transaction terms allows an exchange of payments in each of the two currencies on the settlement date.
The BSP said thrift banks with an existing authority to issue foreign letters of credit and pay, accept, negotiate import, export drafts, or bills of exchange may apply for a Type 2 limited dealer authority to operate as dealer of deliverable FX forwards.
“It is expected that policy amendment will expand the FX risk hedging options of SMEs to the extent that they are better served by thrift banks,” the BSP said.
At a minimum, an applicant bank must demonstrate the following:
- Adequate competence in its general operations
- Hold capital matching the risk assumed or to be assumed from the derivatives activity
- Have and maintain a risk management system that conforms to the principles and complies with the risk management guidelines for derivatives
The BSP added that applicant banks shall also be subjected to the existing licensing process.
Once the Type 2 authority has been approved, a thrift bank can offer FX forwards to clients, subject to certain conditions to ensure that transactions solely relate to clients’ trade-related requirements.
As such, the tenors of the FX forward contracts should match the term of the client’s underlying trade transactions.
To also ensure that banks are undertaking activities in a prudent manner, they will be covered by regulations prescribing capital for market risk, the BSP said.
“Thrift banks are expected to have appropriate practices for the selling and marketing of FX forwards to their clients. Thrift banks that are granted the authority to engage in said derivative transaction shall likewise comply with the provisions of the Manual of Regulations on Foreign Exchange Transactions (MORFXT),” the BSP said.
Under the current regulatory framework, only universal and commercial banks are allowed to offer their own products to clients under either a Type 2 (limited dealer) or a Type 1 (expanded dealer) authority.
More active role in remittance
The MB has also approved the amendments to the powers and scope of authorities of banks to “explicitly recognize” the authority of thrift, rural, and cooperative banks to buy and sell foreign exchange.
“This will enable these banks to play a more active role in the remittance business,” the BSP said.
The amendments are now expressly classifying thrift, rural, and cooperative banks as authorized agent banks (AABs) under the MORFXT.
“The classification of the subject banks as AABs necessarily binds them to strictly abide by the applicable provisions of the MORFXT, particularly on the sale of foreign exchange. Moreover, the banks are expected to manage the risks arising from the exercise of their authority,” the BSP emphasized.
Recognizing that buying and selling of foreign exchange will entail additional market risks, the BSP said: “Monitoring of foreign exchange exposures are adequately captured in the BSP prudential reports and the extent of thrift, rural and cooperative banks’ compliance and assessment of risk management, and risk exposures during the BSP on-site examination.” – Rappler.com
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