Governor Amando Tetangco said the new rules, to take effect after February to give banks time to adjust to the new limits, will cover all kinds of non-deliverable forwards (NDF) and are aimed at improving the regulatory framework for such transactions.
Under the new guidelines, domestic banks' NDF exposure will be limited to 20 percent of capital and the limit of foreign banks will be 100 percent of capital. A breach of the limits will be treated as a supervisory issue, Tetangco said at a media briefing.
"The first objective is to open up the market to qualified participants. There are only a few banks participating in the NDF market so far. We would like to allow other banks to be able to participate in these particular market but with a limit on the overall NDF exposure of banks," the governor said.
He added that the new rules will be based on an internal central bank monitoring of the total market cap that approximates the current level of outstanding NDFs, offshore dollar-based derivatives, as against a previous practice where banks put limits on their exposure under a gentleman's agreement in the industry.
The latest move by the central bank, part of a series of measures to counter speculative inflows that have fed into increased currency volatility, is meant to ensure NDFs are used for legitimate hedging needs.
Tetangco also said early termination of NDF transactions will no longer be allowed under the new rules. He added banks must now get a license for NDF transactions, unlike before where no license was necessary.
Central bank Deputy Governor Nestor Espenilla said in the same briefing monetary that authorities will apply "the full range of sanctions" for a breach of the limits, but did not specify the penalties.
The peso has gained nearly 7 percent this year to become Asia's best performing currency next to the Korean won on strong foreign inflows into Philippine stocks and bonds, fueled by forecasts of sustained and robust domestic economic growth.
The central bank raised the capital charge on NDFs forwards in October last year to curb currency volatility and discourage foreign exchange speculation.
In July, the central bank tightened rules on its short-term special deposit account (SDA) window to keep foreign funds out of the facility, and lowered the SDA rates after the window attracted record funds.
Placements in SDAs, which pay more than government Treasury bills, have not come down substantially after the measure took effect, with total funds in the facility at slightly under 1.7 trillion pesos ($41 billion) as of Nov. 16, against the peak of 1.8 trillion pesos in September, according to latest central bank data.