BSP weighs moves vs forex volatility

As the peso exchange rate breached the 154:$1 yesterday closing at 154.13 to the dollar, the Bangko Sentral ng Pilipinas (BSP) decided to consider additional foreign exchange (FX or forex) policy measures to temper exchange rate volatility after recently reactivating a hedging facility.

It was the lowest level the peso has plumbed versus the American dollar in almost 13 years.

BSP Governor Nestor A. Espenilla Jr., however said that for now, they could leave the rule on banks’ net open foreign exchange position limit as is.

Banks’ allowable open FX position will remain at 20 percent of their unimpaired capital or an absolute limit of $50 million, whichever is lower.

The current rule also imposes a penalty of 130,000 per day, per transaction, whenever a bank is in excess of its oversold or overbought FX limit.

The penalty was last increased in 2006 from its previous amount of only 15,000. The BSP could opt to impose stiffer penalties in violation of the oversold or overbought rule as well as other non-monetary sanctions.

Espenilla said they are preparing “other tools” to dissuade FX speculation which leads to excessive FX volatility.

When asked if the BSP will adjust the cap – whether to remove the limit or not – on net open FX position, Espenilla said – “not at this time.”

“(The BSP is considering) other regulatory actions,” he said. The comment comes after his earlier statement that the BSP will not hesitate to impose actions to discourage speculative activity in the FX market.

Any adjustments in the oversold or overbought limit are prudential measures of the BSP to avoid “excessive exposure of banks” to FX-related risks particularly if this will hit its capital health.

Espenilla said earlier that the BSP would have to time its decision of when to adjust banks’ open net FX position.

The BSP increased the oversold and overbought limit to 20 percent of unimpaired capital in 2007, at the height of the global financial crisis at the time. Prior to this, the overbought position has a cap of 2.5 percent while banks’ oversold position has no limit.

Overbought position is when banks’ FX position leads to an extended upside price movement that is consistent and with no significant retreat. The oversold position is the opposite, or downward price movement.

Last week, the BSP revived the Currency Rate Risk Protection Program (CRPP), which is the non-deliverable forward facility that allows corporates to manage and lessen its FX risk.