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Date Issued: 09.30.2003

Series of 2003

To:   All Banks, Non-Banks with Quasi Banking Functions (NBQBs) and their subsidiaries/ affiliates authorized to engage in derivatives transactions

Subject :    Minimum documentary requirements for foreign exchange (FX) forward and swap transactions

Section 1.   Statement of Policy  

As enunciated in Bangko Sentral ng Pilipinas (BSP) Circular No. 102 dated December 29, 1995 (Section X602 of the Manual of Regulation for Banks), as amended, it is the policy of the BSP to deepen the Philippine financial markets. Towards this end, banks and their customers may hedge thru financial derivatives products their FX obligations and/or exposures eligible for servicing by the banking system under Circular No. 1389 dated April 13, 1993, as amended.

As a rule, banks, NBQBs and their subsidiaries/affiliates duly authorized to engage in derivatives transactions under Circular No. 297 dated September 17, 2001 may only enter into derivatives contracts with their customers where either party to the transaction is hedging eligible actual FX obligations or existing FX exposures.

To ensure that such financial derivatives products are not used for activities that destabilize the FX market, the guidelines as well as minimum documentary requirements for FX forwards and swaps as indicated herein shall be strictly adhered to.

Section 2.   Definition of Terms  

“Foreign exchange obligation” shall refer to an actual FX commitment to a non-resident or any Authorized Agent Bank (AAB) where the amount, payment tenor and party have been determined.

“Foreign exchange exposure” shall refer to an FX risk arising from an existing commitment to or from a non-resident or AAB which leads to payment of an FX obligation or receipt of an FX asset based on verifiable documents on deal date.  

“Resident” shall refer to -

  1. An individual citizen of the Philippines residing therein; or  
  2. An individual who is not a citizen of the Philippines but is permanently residing therein; or
  3. A corporation or other juridical person organized under the laws of the Philippines; or  
  4. 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” refers 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” refers to a transaction involving the exchange of two currencies at a rate agreed on deal date for value or delivery (cash settlement) at some time in the future (more than two business days later).

"Non-Deliverable Forward (NDF)” refers to the forward FX contract where only the net difference between the contracted forward rate and the market rate shall be settled at maturity.  

Section 3.   Documentation

Minimum documentary requirements for FX forward and swap transactions in the attached Annex “A” shall be presented on or before deal date to the banks, NBQBs and their subsidiaries/affiliates.  

Unless otherwise indicated, documents as per Annex “A” shall be stamped “DELIVERABLE/FX HEDGED” or NON-DELIVERABLE/FX HEDGED” upon presentation/ submission indicating the date and amount hedged and signed by authorized officer of the banks, NBQBs and their subsidiaries/affiliates. Copies of all duly marked supporting documents shall be retained by the banks/NBQBs and/or their subsidiaries/ affiliates and shall be made available to the BSP for verification. Said copies shall be marked “DOCUMENTS PRESENTED AS REQUIRED” and signed by the servicing entity’s authorized signatory.

No double hedging shall be allowed covering the same underlying FX obligation/ exposure.

Section 4.   Tenor/Maturity of FX Forward or Swap

a.   FX Forwards (whether deliverable or non-deliverable) and Swaps (sale of FX at first leg and purchase of FX at second leg)  

The tenor/maturity 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. However, for foreign currency loans, the tenor of the deliverable FX forward shall be co-terminus with the maturity of the underlying obligation. This shall not preclude pretermination of the contract due to prepayment provided prior BSP approval is obtained.

The FX proceeds of deliverable FX forward contracts shall be immediately remitted or paid to the non-resident supplier/beneficiary or AAB 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. 

b.   Swaps (purchase of FX at first leg and sale of FX at second leg)  

The tenor/maturity of swap contracts shall not be less than thirty (30) calendar days but not longer than: (i) the maturity of the underlying FX obligation; or (ii) the approximate due date of settlement of the FX exposure. In case of prepayments of foreign currency loans covered by swaps, banks shall ensure that such prepayments are allowed under the covering loan agreement.  

Section 5.   Cancellations, Roll-overs or Non-delivery of FX Forward Contracts

 All cancellations, roll-overs or non-delivery of FX forward contracts, whether purchases or sales, shall be subject to the following guidelines to determine the validity thereof:

  1. Eligibility Test - forward contracts must be supported by documents listed in Annex “A” hereof.
  2. 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.
  3. Counterparty Test – the cancellation or roll-over of forward 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.
  4. Mark-to-Market Test – the booking or recording in the books of accounts of the profit or loss on contracted forward 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 6.   NDF Contracts with Non-residents

NDF contracts to sell FX to non-residents shall continue to be covered by the provisions of Circular No. 135 dated July 22, 1997 and Circular No. 344 dated August 9, 2002.

Section 7.   Compliance with Anti-Money Laundering Rules All transactions under this Circular shall comply with existing regulations on Anti-Money Laundering.

Section 8.   Reporting Requirements

Banks, NBQBs and their subsidiaries/affiliates 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 forward contracts shall be reported electronically in excel format to the BSP not later than two (2) banking days after reference week using the format prescribed in Annex “B”.

 Swap contracts with non-bank resident counterparties involving purchase of FX at the initial leg by said banks, NBQBs and their subsidiaries/affiliates from non-bank counterparties shall likewise be reported electronically in excel format to the BSP not later than two (2) banking days after reference week using the format prescribed in Annex “C”.

Above-cited reports shall be transmitted to e-mail address iod@bsp.gov.ph.

Section 9.   Sanctions

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.

Failure to comply with Section 5 hereof (Cancellations, Roll-overs or Non-delivery of Forward Contracts) shall result in the exclusion of the forward contracts in the computation of the bank’s consolidated daily position starting from day 1, i.e., when the individual contracts were entered into. Violations of the prescribed FX position limits shall be subject to the sanctions provided under Circular Letter dated March 13, 1998.

Furthermore, reports required under Section 8 hereof are considered as major reports (Category A) for purposes of imposing sanctions on delayed, erroneous or amendatory reports as prescribed under the appropriate BSP Manual of Regulations.

Counterparties that habitually cancel deliverable forwards without proper justification may be subject of a BSP watchlist.

Section 10.   Repealing Clause

The provisions of Circular Letters dated October 24, 1997 (on cancellations or non-delivery of outstanding forward sales contracts) and March 13, 2003 (providing a maximum 6-month tenor for forward contracts) and all other BSP issuances that may be inconsistent with the provisions of this Circular are hereby repealed.

Section 11.   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.



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