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Friday, March 29, 2024

Bangko Sentral revives currency risk protection

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The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, reactivated the Currency Rate Risk Protection Program to ease the pressures on the peso which hit a 13-year low of 54.14 against the US dollar last week.

The Bangko Sentral said the board approved the enhanced guidelines on CRRP, a non-deliverable forward hedging facility first introduced in December 1997 at the height of the Asian financial crisis.

It aims to ease the strain on the spot market amid demand pressure from unhedged borrowers wanting to cover their future foreign exchange requirements on fears of further peso depreciation.

The peso depreciated 8 percent since the start of the year, hitting the 54-a-dollar mark last week, before closing slightly higher at 53.97 against the greenback on Sept. 14.  

Under CRRP, eligible bank borrowers such as oil companies, exporters and other corporations agree that on maturity of the forward contract, only the net difference between the contracted forward rate and the spot rate would be settled in pesos. 

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“Obligations eligible under the CRPP facility are the unhedged foreign currency obligations in amounts of not less than $50,000 that are current and outstanding as of the date of application,” the Bangko Sentral said in a statement over the weekend.

These include the BSP-reported/registered short-term trade-related loans from eligible banks; medium/long-term trade-related FCDU/RBU loans with payments maturing within 90 days as of the date of application; short-term trade-related borrowings of oil companies from offshore banking units; and US dollar trust receipts. The maximum tenor of the CRPP contract is 90 days with an option to reavail.

To facilitate the transactions under the CRPP facility, the Bangko Sentral provides various regulatory relief. Exposures under the CRPP facility are not subject to NDF position limits. 

The Bangko Sentral said reduced market risk capital charges would be applied for net open positions for NDFs under the facility. Universal banks/commercial banks also do not need additional derivatives authority as transactions under the CRPP are considered generally authorized derivatives activities. 

The terms, conditions and the reporting requirements of the CRPP facility will be covered by a separate issuance on the implementing guidelines of the CRPP facility, the Bangko Sentral said.

Bangko Sentral Governor Nestor Espenilla Jr. earlier agreed to reactivate the CRPP facility amid the recent weakness of the peso against the US dollar triggered by the country’s widening trade deficit, a protracted trade war between the US and China and the expected further interest rate hike by the Federal Reserve.

The Bangko Sentral also raised the benchmark interest rate by a total of 100 basis points this year to 4 percent and is expected to continue the tightening measure amid the rising inflation rate and weakening peso.

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