BSP rules on FX forwards and swaps

Issuance, date, and effectivity rule

BSP Circular No. 591, s. of 2007 is entitled “Guidelines for FX Forward and Swap Transactions Involving the Philippine Peso.”
The circular is adopted on December 27, 2007 by the BSP Monetary Board, signed by the Governor (Amando M. Tetangco, Jr.).
The circular takes effect fifteen (15) calendar days after publication in the Official Gazette or a newspaper of general circulation in the Philippines.

Key definitions for terms used

Customers include:
- (a) resident banks (other than commercial and universal banks) and non-bank BSP-supervised entities (NBBSEs) not authorized to engage in FX forwards and swaps as dealers;
- (b) resident non-bank entities; and
- (c) non-residents, both banks and non-banks.
Foreign exchange obligation means an actual commitment to repatriate or pay to a non-resident or an Authorized Agent Bank (AAB) a specific amount of foreign currency on a pre-agreed date.
Foreign exchange exposure means an FX risk arising from an existing commitment that will lead to an actual payment of FX to, or receipt of FX assets from, non-residents or an AAB, based on verifiable documents on deal date.
FX risks arising from BSP-registered foreign investments without specific repatriation dates are treated as FX exposures.
Resident means:
- (a) a Philippine citizen residing in the Philippines;
- (b) a non-citizen who is permanently residing in the Philippines;
- (c) a corporation or other juridical person organized under Philippine laws; and
- (d) a branch, subsidiary, affiliate, extension office of a corporation or juridical person organized under foreign laws operating in the Philippines, except Offshore Banking Units.
Non-resident means an individual, corporation, or juridical person not included in the definition of resident.
Foreign exchange swap means an exchange of the same two currencies (principal amount only) on a specific date at a rate agreed on deal date (first leg), and a reverse exchange on a future date at a rate (different from the first leg) agreed on deal date.
Foreign exchange forward means a contract to purchase/sell a specified amount of currency against another at a specified exchange rate for delivery at a specified future date three or more business days after deal date.
Non-Deliverable Forward (NDF) means an FX forward contract where only the net difference between the contracted forward rate and the market rate at maturity (the fixing rate) is settled on the forward date.

Documentation requirements and bank marking

Minimum documentary requirements for FX forward and swap transactions are those listed in Annex “A.”
The required documents must be presented on or before deal date to the banks unless otherwise indicated.
FX selling banks must stamp supporting documents upon presentation by customers using the applicable marking:
- For hedging transactions: “FX HEDGED/DELIVERABLE” or “FX HEDGED/NON-DELIVERABLE”.
- For funding transactions: “FX SOLD”, indicating the contract date and amount involved, and signed by the bank’s authorized officer.
Banks must retain copies of all duly marked supporting documents and must make them available to the BSP for verification.
Retained copies must also be marked “DOCUMENTS PRESENTED AS REQUIRED” and signed by the bank’s authorized officer.

Tenor, maturity limits, and NDF settlement

Forward sale contracts (deliverable or non-deliverable) must have a tenor/maturity not longer than:
- (i) the maturity of the underlying FX obligation; or
- (ii) the approximate due date or settlement of the FX exposure.
For deliverable FX forward contracts, the tenor/maturity must be co-terminus with the maturity of the underlying obligation or the approximate due date/settlement of the FX exposure.
Pretermination is allowed due to prepayment of the underlying obligation or exposure.
For foreign currency loans, prepayment requires prior BSP approval, and a copy of that approval must be presented to the bank counterparty.
FX swap contracts have no restriction on tenor.
All NDF contracts with residents must be settled in pesos.

Deliverable FX proceeds and beneficiary remittance

FX proceeds of deliverable forward and swap contracts must be delivered by the bank counterparty directly to the beneficiaries concerned.
Beneficiaries are identified as the FCDU of a bank or a non-resident entity (e.g., creditor, supplier, investor) to whom the customer is committed to pay/remit FX.
For foreign investments, FX proceeds of deliverable forward and swap contracts must be reconverted to Philippine pesos and re-invested in eligible peso instruments such as those listed in Item A.2.2 of Annex “A.”

Forward contracts with non-residents

Forward contracts to sell foreign exchange to non-residents (including off shore banking units) that involve no full delivery of principal, including cancellations and roll-overs/renewals, must be submitted for prior clearance to the BSP.
Every roll-over of short-term (ST) deliverable forward contracts with non-residents need not be prior-approved if all conditions are met:
1. The underlying transaction for each ST deliverable FX forward contract is a foreign investment in long-term (LT) Philippine government securities for which a Bangko Sentral Registration Document (BSRD) has been issued.
2. The roll-over is effected during the tenor of the underlying LT Philippine government securities.
3. Actual delivery/settlement of the forward contract coincides with the intended capital repatriation date of the BSP-registered investments.
4. The value of the forward contract does not exceed the foreign currency equivalent of the maturity value/net proceeds of the BSP-registered investments computed at the agreed forward exchange rate.
5. Repatriation of capital and remittance of income comply with documentary requirements under existing BSP rules.

Validity conditions for cancellations and roll-overs

Cancellations, roll-overs, or non-delivery of all FX deliverable forward contracts and the forward leg of swap contracts must follow guidelines for validity.
The Eligibility Test requires that contracts must be supported by documents listed in Annex “A.”
The Frequency Test requires that the reasonableness of the cancellation, roll-over, or non-delivery be based on the evaluation of the justification/explanation submitted by banks, supported by appropriate documents.
The Counterparty Test requires that cancellation or roll-over be duly acknowledged by the counterparty, shown in documents submitted by banks (including counterparty conforme evidenced by counterparty signature on pertinent documents).
The Mark-to-Market Test requires full support for booking/recording of profit (or loss) and for contracts and cash flows/settlement to counterparties, supported by appropriate documents (including an authenticated copy of debit/credit tickets and schedules showing, among others, mark-to-market valuation computation).

AML compliance requirement

All transactions under the circular must comply with existing anti-money laundering regulations under Republic Act No. 9160 (Anti-Money Laundering of 2001) dated September 29, 2001, as amended.

Reporting to BSP for derivatives transactions

Banks authorized to engage in derivatives transactions remain subject to the BSP’s existing reporting requirements on financial derivatives.
Cancellations, roll-overs, or non-delivery of deliverable FX forward contracts and the forward leg of swap contracts must be reported electronically in excel format to the BSP not later than five (5) banking days after reference month using the format in Annex “B.”
Swap contracts involving purchase of FX by banks at the initial leg must be reported electronically in excel format to the BSP not later than five (5) banking days after reference month using the format in Annex “C.”
Reports must be transmitted to the International Department at iod@bsp.gov.ph and copied to the Supervisory Data Center (SDC) at:
- sdcfxkbdom@bsp.gov.ph (for Domestic Banks), and
- sdcfxkbfor@bsp.gov.ph (for Foreign Banks).

Sanctions and consequences of violations

Violations of the circular are subject to the penalty provisions under R.A. No. 7653 (The New Central Bank Act) and other existing banking laws and regulations.
For sanctions for delayed, erroneous, or unsubmitted reports, the reports required under Section 8 are classified as Category B reports and are subject to the corresponding penalties under the BSP Manual of Regulations for Banks.

Coverage of NBBSEs if later authorized

NBBSEs that may later be authorized to engage in FX forwards and swaps as dealers are covered by the provisions of the circular.

Repeal of inconsistent BSP rules

Circular Nos. 135, 344, and 407 dated July 22, 1997, August 9, 2002, and September 30, 2003, respectively, are repealed/amended accordingly insofar as they conflict with the circular’s provisions, including:
- Section 1602 and
- Subsections X602.14 to X602.21 and X602.26 of the Manual of Regulations for Banks (MORB).
All other BSP issuances and/or MORB sections inconsistent with the circular’s provisions are repealed/amended accordingly.