The Monetary Board approved the amendments to the regulations governing the derivatives activities of banks to allow thrift banks (TBs) with the authority to issue foreign Letters of Credit (LCs) and pay/accept/negotiate import/export drafts/bills of exchange, to act as dealers of deliverable foreign exchange (FX) forwards, if they meet certain criteria. Under the existing 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. 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.
Under the new rules, thrift banks with an existing authority to issue foreign letters of credit and pay/accept/negotiate import/export drafts/bills of exchange may apply for a Type 2 Limited Dealer authority to operate as dealer of deliverable FX forwards. Applicant banks shall be subject to the existing licensing process. At a minimum, an applicant bank must demonstrate adequate competence in its general operations, hold capital commensurate to the risk assumed or to be assumed from the derivatives activity and have and maintain a risk management system that conforms to the principles and complies with the risk management guidelines for derivatives.
Once the Type 2 authority is 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. Thus, the tenors of the FX forward contracts should match the term of the client’s underlying trade transactions. Further, to ensure banks are undertaking activities in a prudent manner, they will be covered by regulations prescribing capital for market risk. In addition, 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).