Banks wanting to expand or get into foreign currency- denominated transactions can do so provided they adopt a risk management framework commensurate to the scope and risk profile of their foreign exchange activities. The easing of rules is contained in Circular 1134 signed by Bangko Sentral Governor Benjamin Diokno or December 28.
To allow banks opportunity to perform efficient and flexible liquidity cash management on foreign currency deposits, the Bangko Sentral ng Piipinas eased the stringent conditions on lending to regular banking units by the FCDUs.
BSP Governor Benjamin Diokno signed Circular 1134 series of 2021 on December 28, which streamlined related licensing requirements for banks applying for FCDU authority.
FCDUs are local units of banks that are allowed by the BSP to participate in activities involving foreign currency transactions.
These units may be granted authority to engage in financial futures and options trading, provided they have sought approval from the central bank.
“Covered banks will only have to notify the BSP of their intention to engage in expanded/FCDU operations. They are, however, expected to comply with the standards and requirements of the expanded FCDU license on a continuing basis,” the BSP said.
Banks were previously required to seek the BSP’s prior approval before they can engage in expanded FCDU transactions.
The circular also allowed Islamic banks and digital banks to engage in foreign currency deposit units, as the BSP announced earlier this month.
Risk management
Banks are now expected to adopt a risk management framework that will be commensurate to the scope and risk profile of their foreign exchange activities.
“This framework should cover all material risks from foreign currency denominated transactions including market risk, liquidity risk and operational risk, among others,” the circular read.
Financial institutions are required to maintain a separate accounting for these FCDU transactions, the circular said. This will be used to prepare for the balance sheet and income statement, as well as risk management reports and tax purposes of FCDUs.
There are 76 banks that were granted FCDU authority by the central bank as of May 2021.
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