BSP sets new net open foreign exchange position limit

The Monetary Board (MB) approved an increase in the net open foreign exchange position (NOP) limit for banks that recognizes the increased demand for foreign exchange (FX) arising from the growth in the volume of underlying trade transactions and investments.

“This reform initiative aims to ensure that banks can continually provide ample liquidity in the market and service client demand for FX,” according to MB Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

The NOP limit shall be raised to the lower of 25 percent of qualifying capital or USD150 million, from the previous limit of 20 percent of unimpaired capital or USD50 million, whichever is lower. A bank’s NOP represents the amount of its net assets and/or liabilities denominated in foreign currency.

“The increase in the NOP limit is part of a larger set of amendments to the framework for the management of banks’ open FX positions, which aim to make the calculation and measurement of a bank’s NOP more risk-based,” explained Governor Diokno.

Among the changes is the use of qualifying capital as base for the computation of the NOP limit. This aligns the said base with that used to measure a bank’s capital requirement for its FX risk.

A new calculation methodology for the FX NOP is likewise prescribed, with the open position computed as the higher of the absolute value of the sum of net long or short positions in individual currencies, rather than as the net position across all currencies. This is consistent with the computation of a bank’s FX position under the risk-based capital adequacy framework. The newly-adopted approach is widely accepted and used by other jurisdictions.

The revised framework also provides greater flexibility to the regulator for dealing with breaches in the FX NOP limit. It moves beyond the imposition of monetary penalties, and instead applies a supervisory framework that allows the BSP to deploy a range of supervisory actions depending on the gravity and persistence of NOP limit breaches, with the objective of ensuring that FX risk does not threaten a bank’s safety and soundness.

The foregoing amendments shall take effect on 1 August 2021. As the revised computation methodology shall necessitate the implementation of a new reporting template, a one-month parallel run of the new report with the existing report shall be conducted from 1 to 31 July 2021.