Guidelines for FX Forward and Swap Transactions Involving the Philippine Peso

December 27, 2007 BSP CIRCULAR NO. 591-07 TO : All Banks Authorized to Engage in Foreign Exchange (FX) Forwards and Swaps SUBJECT : Guidelines for FX Forward and Swap Transactions Involving the Philippine Peso SECTION 1. Statement of Policy. It is the policy of the Bangko Sentral ng Pilipinas (BSP) to support the deepening of the Philippine financial markets. In line with this policy, customers may, thru foreign exchange (FX) forwards, hedge their market risks arising from FX obligations and/or exposures provided that forward sale of FX (deliverable and non-deliverable) may only be used when the underlying transaction is eligible for servicing by the banking system under Circular No. 1389 dated 13 April 1993, as amended. Customers may, likewise, cover their funding requirements thru FX swaps. Banks may only engage in FX forwards and swap transactions with customers if the latter is hedging market risk or covering funding requirements. There shall be no double/multiple hedging such that at any given point in time, the total notional amount of the FX derivatives transaction/s shall not exceed the amount of the underlying FX obligation/exposure. The customer shall no longer be allowed to buy FX from the banking system for FX obligations/exposures that are fully covered by deliverable FX forwards and FX swaps. The following guidelines, as well as minimum documentary requirements, shall cover FX forward and swap transactions involving the Philippine peso between authorized dealer banks and their customers. SECTION 2. Definition of Terms. "Customers" shall refer to: (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" shall refer to an actual commitment to repatriate or pay to a non-resident or any authorized agent bank (AAB) a specific amount of foreign currency on a pre-agreed date. IHDCcT "Foreign exchange exposure" shall refer to an FX risk arising from an existing commitment which will lead to an actual payment of FX to, or receipt of FX assets from, non-residents or any Authorized Agent Bank (AAB) based an verifiable documents on deal date. FX risks arising from BSP-registered foreign investments without specific repatriation dates are considered FX exposures. "Resident" shall refer to a. An individual citizen of the Philippines residing therein; or b. An individual who is not a citizen of the Philippines but is permanently residing therein; or c. A corporation or other juridical person organized under the laws of the Philippines; or d. A branch, subsidiary, affiliate, extension office or any other unit of corporations or juridical persons which are organized under the laws of any country and operating in the Philippines, except Offshore Banking Units. "Non-resident" shall refer to an individual, a corporation or other juridical person not included in the definition of resident. "Foreign exchange swap" shall refer to a transaction involving the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed on deal date (the first leg), and a reverse exchange of the same two currencies at a date further in the future (the second leg) at a rate (different from the rate applied to the first leg) agreed on deal date. "Foreign exchange forward" shall refer to 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)" shall refer to an FX forward contract where only the net difference between the contracted forward rate and the market rate at maturity (i.e., the fixing rate) shall be settled on the forward date. SECTION 3. Documentation. DTIaCS Minimum documentary requirements for FX forward and swap transactions listed in the attached Annex "A" shall be presented on or before deal date to the banks unless otherwise indicated. FX selling banks shall stamp the supporting documents upon presentation by customers as follows: a. For hedging transactions: "FX HEDGED/DELIVERABLE" or "FX HEDGED/NON-DELIVERABLE"; b. For funding transactions: "FX SOLD", indicating the contract date and amount involved, and signed by the bank's authorized officer. Copies of all duly marked supporting documents shall be retained by the banks and made available to the BSP for verification. The retained copies shall also be marked "DOCUMENTS PRESENTED AS REQUIRED" and signed by the bank's authorized officer. SECTION 4. Tenor/Maturity and Settlement. a. Forward Sale of FX (whether deliverable or non-deliverable) The tenor/maturity of such contracts shall not be 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 shall be co-terminus with the maturity of the underlying obligation or the approximate due date or settlement of the FX exposure. This shall not preclude pre-termination of the contract due to prepayment of the underlying obligation or exposure, provided that for foreign currency loans, prior BSP approval has been obtained for the prepayment and a copy of such approval is presented to the bank counterparty. b. FX Swaps No restriction on tenor. c. Settlement of NDFs All NDF contracts with residents shall be settled in pesos. d. Remittance of FX proceeds of deliverable forward and swap contracts llcd FX proceeds of deliverable forward and swap contracts shall be delivered by the bank counterparty directly to the beneficiaries concerned except for foreign investments where said FX proceeds are reconverted to Philippine pesos and re-invested in eligible peso instruments such as those listed in Item A.2.2 of Annex "A" hereof. For this purpose, beneficiaries shall refer to 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. SECTION 5. Forward Contracts with Non-residents. All forward contracts to sell foreign exchange to non-residents (including offshore banking units) with no full delivery of principal, including cancellations, roll-overs/renewals shall be submitted for prior clearance to the BSP. However, every roll-over of short-term (ST) deliverable forward contracts with non-residents need not be prior-approved, provided: 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. The actual delivery/settlement of the forward contract coincides with the date of the intended capital repatriation 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; and 5. The repatriation of capital and remittance of income for the BSP-registered investment complies with documentary requirements under existing BSP rules. SECTION 6. Cancellations, Roll-overs or Non-delivery of FX Forward and Swap Contracts. All cancellations, roll-overs or non-delivery of all FX deliverable forward contracts and the forward leg of swap contracts shall be subject to the following guidelines to determine the validity thereof: aAEIHC a. Eligibility Test Contracts must be supported by documents listed in Annex "A" hereof. b. Frequency Test the reasonableness of the cancellation, roll-over or non-delivery shall be based on the results of the evaluation of the justification/explanation submitted by banks as evidenced by appropriate documents. c. Counterparty Test the cancellation or roll-over of contracts must be duly acknowledged by the counterparty to the contract as shown in documents submitted by banks, e.g., there should be conforme of counterparty as evidenced by the counterparty signature on pertinent documents. d. Mark-to-Market Test the booking or recording in the books of accounts of the profit or loss on contracts and cash flows/settlement to counterparties must be fully supported by appropriate documents such as authenticated copy of debit/credit tickets, schedules showing among others, mark-to-market valuation computation, etc. SECTION 7. Compliance with Anti-Money Laundering Rules. All transactions under this Circular shall comply with existing regulations on anti-money laundering pursuant to the provisions of Republic Act No. 9160 (Anti-Money Laundering Act of 2001) dated 29 September 2001, as amended. SECTION 8. Reporting Requirements. Banks duly authorized to engage in derivatives transactions shall continue to be covered by the BSP's existing reporting requirements on financial derivatives. Cancellations, roll-overs or non-delivery of deliverable FX forward contracts and under the forward leg of swap contracts shall be reported electronically in excel format to the BSP not later than five (5) banking days after reference month using the format prescribed in Annex "B". Swap contracts with counterparties involving purchase of FX by banks at the initial leg shall likewise be reported electronically in excel format to the BSP not later than five (5) banking days after reference month using the format prescribed in Annex "C". The reports shall be transmitted to the International Department at [emailprotected], copy furnished the Supervisory Data Center (SDC) at the following addresses: [emailprotected] (for Domestic Banks) and [emailprotected] (for Foreign Banks). SECTION 9. Sanctions. Violations of this Circular shall be subject to the penalty provisions under R.A. No. 7653 (The New Central Bank Act) and other existing banking laws and regulations. IEcDCa For purposes of imposing sanctions for delayed, erroneous or unsubmitted reports, reports required under Section 8 hereof are classified as Category B reports and subject to corresponding penalties prescribed under the BSP Manual of Regulations for Banks. SECTION 10. Non-Bank BSP Supervised Entities (NBBSEs). NBBSEs that may subsequently be authorized to engage in FX forwards and swaps as dealers shall likewise be covered by the provisions of this Circular. SECTION 11. Repealing Clause. The provisions of Circular Nos. 135, 344 and 407 dated 22 July 1997, 9 August 2002, and 30 September 2003, respectively [Section 1602 and Subsections X602.14 to X602.21 and X602.26 of the Manual of Regulations for Banks (MORB)] and all other BSP issuances and/or Sections of the MORB that are inconsistent with the provisions of this Circular are hereby repealed/amended accordingly. SECTION 12. Effectivity. This Circular shall take effect fifteen (15) calendar days after publication in the Official Gazette or a newspaper of general circulation in the Philippines. FOR THE MONETARY BOARD: (SGD.) AMANDO M. TETANGCO, JR. Governor ANNEX A GUIDELINES AND MINIMUM DOCUMENTARY REQUIREMENTS FOR FOREIGN EXCHANGE (FX) FORWARD AND SWAP TRANSACTIONS The following is a list of minimum documentary requirements for FX forward and swap transactions. Unless otherwise indicated, original documents * shall be presented on or before deal date to banks. aCSTDc A. FORWARD SALE OF FX TO COVER OBLIGATIONS DELIVERABLE AND NON-DELIVERABLE 1. FORWARD SALE OF FX TRADE 1.1 Trade Transactions 1.1.1. Under Letters of Credit (LC) a. Copy of LC opened; and b. Accepted draft or Commercial invoice/Bill of Lading 1.1.2 Under Documents against Acceptances (DA)/Open Account (OA) Arrangements a. Certification of reporting bank on the details of DA/OA under Schedule 10 (Import Letters of Credits Opened and D/A-O/A Import Availments and Extensions) of FX Form 1 (Consolidated Report on Foreign Exchange Assets and Liabilities); b. Copy of commercial invoice. In addition to the above requirements, the bank shall require the customer to submit a Letter of Undertaking that: i. Before or at maturity date of the forward contract, it (the importer) shall comply with the documentation requirements on sale of FX for trade transactions under existing regulations; and ii. No double hedging has been obtained by the customer for the covered transactions. 1.1.3 Direct Remittance Original shipping documents indicated in item [I.a of Circular Letter dated 24 January 2002. 2. NON-TRADE TRANSACTIONS Only non-trade transactions with specific due dates shall be eligible for forward contracts, and shall be subject to the same documentation requirements under Circular No. 388 dated 26 May 2003 with the following additional guidelines for foreign currency loans and investments. DCcTHa 2.1 Foreign Currency Loans owed to non-residents or AABs 2.1.1 Deliverable Forwards The maturing portion of the outstanding eligible obligation, i.e., those that are registered with the BSP, including interest and fees thereon as indicated in the BSP registration letter, may be covered by a deliverable forward subject to the documentary requirements under Circular No. 388. A copy of the creditor's billing statement may be submitted on or before the maturity date of the contract. 2.1.2 NDFs The outstanding eligible obligation, i.e., those that are registered with the BSP, including interests and fees thereon as indicated in the BSP registration letter, may be covered by a NDF, subject to the documentary requirements under Circular No. 388, except for the creditor's billing statement which need not be submitted. The amount of the forward contract shall not exceed the outstanding amount of the underlying obligation during the term of the contract. 2.2 Inward Foreign Investments The unremitted amount of sales/maturity proceeds due for repatriation to non-resident investors pertaining to BSP-registered investments in the following instruments issued by a Philippine resident: a. shares of stock listed in the Philippine Stock Exchange (PSE); b. government securities; c. money market instruments; and d. peso time deposits with a minimum tenor of 90 days may be covered by FX forward contracts subject to the presentation of the original Bangko Sentral Registration Documents (BSRD) on or before deal date. However, for Item 2.2.a above, original BSRD or BSRD Letter-Advice, together with the broker's sales invoice, shall be presented on or before maturity date of the FX forward contract, which date coincides with the settlement date of the PSE transaction. AICHaS Sales proceeds of BSP-registered investments in shares of stock that are not listed in the PSE may be covered by a deliverable FX forward contract only if determined to be outstanding as of deal date for the contract and payable on a specific future date as may be indicated in the Contract To Sell/Deed of Absolute Sale and subject to the same documentary requirements under Circular No. 388. B. FORWARD SALE OF FX TO COVER EXPOSURES DELIVERABLE AND NON-DELIVERABLE 1. TRADE (DELIVERABLE AND NON-DELIVERABLE) 1.1 Under LC a. Copy of LC opened; and b. Proforma Invoice, or Sales Contract/Purchase Order 1.2 Under DA/OA, Documents Against Payment (DP) or Direct Remittance (DR) Any of the following where delivery or shipment shall be made not later than one (1) year from deal date: a. Sales Contract b. Confirmed Purchase Order c. Accepted Proforma Invoice d. Shipment/Import Advice of the Supplier In addition to the above requirements, the bank shall require the customer to submit a Letter of Undertaking that: i. At maturity of the forward contract, it shall comply with the documentation requirements on the sale of FX for trade transactions under Circular-Letter dated 24 January 2002, as amended; and ii. No double hedging has been obtained by the customer for the covered transactions. 2. NON-TRADE (NON-DELIVERABLE) The outstanding balance of BSP-registered foreign investments without specific repatriation date, appearing in the covering BSRD may only be covered by an NDF contract, based on its market/book value on deal date, subject to prior BSP approval and if already with BSRD, presentation of the covering BSRD and the proof that the investment still exists (e.g., stock certificate, or broker's buy invoice, or confirmation of sale, or certificate of investment in money market instruments, or certificate of peso time deposits). Hedging of permanently assigned capital of Philippine branches of foreign banks/firms is not allowed. cEHSIC C. FORWARD PURCHASE OF FX Such FX forward contracts shall be subject to the bank's "Know Your Customer" policy and existing regulations on anti-money laundering. In addition, counterparties must be limited to those that are manifestly eligible to engage in FX forwards as part of the normal course of their operations, and which satisfy the bank's suitability and eligibility rules for such transactions. D. FX SWAP TRANSACTIONS 1. FX SALE ( first leg )/FORWARD FX PURCHASE ( second leg ) The same minimum documentary requirements for sale of FX under BSP Circular No. 388 for non-trade transactions, and Circular-Letter dated 24 January 2002, as amended, for trade transactions, shall be presented on or before deal date. 2. FX PURCHASE ( first leg )/FORWARD FX SALE ( second leg ) The first leg of the swap will be subject to the bank's "Know Your Customer" policy and existing regulations on anti-money laundering. The second leg of the swap will be subject to the swap contract between the counterparties. Swap contracts of this type intended to fund peso loans to be extended by non-residents in favor of residents shall require prior BSP approval. SacTCA * If copy is indicated, it shall mean photocopy, electronic copy or facsimile of original.