• Corporate FX

NDF Non-Deliverable Forwards

NDF Non-Deliverable Forwards

NDF Non-Deliverable FX Forwards

NDF FX Forwards – Corporate FX Risk Management

Do you currently transact and hedge risk FX using NDF Forwards which are cash settled at expiry rather than physically delivered?

Are you a UK company or corporate group with global balance sheet assets held in non-accounting currencies?

Are you a professional client already using NDF Forward Contracts to protect translational risk using a UK bank or FX broker?

Are you investigating using NDF Forwards for FX risk management purposes?

Do you have Legal Entity Identifiers registered for each of your corporate entities?

Does your bank or FX broker currently manage your regulatory reporting of regulated FX hedges?

If you are reviewing practices, solutions and strategies for managing Corporate and Business balance sheet FX Risks. Please reach out to us for a discussion today, there are no obligations to use our services. It would be useful to understand your specific needs and first determine appropriateness.

Non-Deliverable FX Forwards

Non-Deliverable Foreign Exchange Forwards – Business FX Hedging

Commonly companies will use Forward Contracts to protect business transactional risks. These are known as Deliverable Forward Contracts and are used to protect the underlying purchases or sale of good and services.

Due to the deliverable nature of such Forward Contracts, they are categorised as Means of Payment, and as a result fall outside of the scope of regulation and regulatory reporting. If you are in doubt whether or not an FX Risk Management product is regulated, reach out to your bank or FX broker for direction.

There are a broad range of factors which determine whether an FX Forward Contract is regulated and reportable. It’s always appropriate to confirm this prior to placing any FX hedging contracts.

What is a Non-Deliverable FX Forward Contract?

What is an NDF Foreign Exchange Forward Contract

In some circumstances companies will secure FX Forward Contracts that they don’t plan to physically deliver. Instead, at expiry the contract is reversed and there is a settlement flow of the difference (profit or loss) on the FX hedge.

A company may need to protect Balance Sheet Translational Risk, so will use NDF Forwards to protect this risk. At expiry, the Balance Sheet Assets would remain in the non-functional currencies and thus the contract is not physically delivered. The ultimate goal of the company is to protect the value of Balance Sheet Items when revalued into functional/accounting currency for financial reporting.

As NDF Forwards are regulated products, appropriateness would first need to be determined. We support professional clients with regulated NDF Forwards.

In the first instance, please kindly reach out by phone or email to discuss your specific needs. Once appropriateness has been determined, we can discuss the exact mechanics of an NDF Forward. If you are searching for specific pricing. This can be discussed once client categorisation and onboarding has been covered.

How Does a Non-Deliverable FX Forward Work?

NDF Forward Overview

The workings of an NDF Forward are very similar to a regular forward contract secured for delivery. The specific amount of currency is bought or sold for a future date. At expiry, rather than physically taking delivery of the contract, the forward is reversed and the net difference is settled creating either an inflow or outflow of funds for the client.

Most often, NDF Forwards are used to hedge underlying assets such as balance sheet assets. So whilst there is an inflow or outflow or funds at expiry. The profit or loss will be netted against the underlying balance sheet item being hedged.

Often NDF Forwards are used on an ongoing rolling basis. In practice, an NDF Forward might be booked for one-month or three-months. At expiry, the value of the contract is netted and then a new contract is secured for a following time-period.

NDF Forward Versus A Deliverable Forward

Deliverable Forward Contracts

When securing a deliverable forward contract. The underlying product or service being hedged will result in a full delivery cashflow at expiry. For example, a UK consultancy provides a service to a customer in Europe and is paid in Euros over 12 months. The company secures a deliverable forward contract selling Euros into sterling over the period. As the Euro funds are received from the customer, the company then settles against the deliverable forward contract and receives sterling settlement from the delivered contract.

In contrast, a UK company may alternatively hold assets on their balance sheet denominated in Euros and prepares financial reports in sterling. This creates a translational risk based on the GBP to EUR exchange rate. As a result, the company may opt to place a forward contract selling Euros into sterling to stabilise and protect the value of the EUR assets on their balance sheet. At expiry, there will not be a full delivery of funds as the company will retain balance sheet assets in Euros. Thus, in this scenario the company would net settle the forward contract at expiry, a non-deliverable forward contract.

Given the nature and added complexity of Non-Deliverable Forwards. The contracts are only suitable in specific circumstances and are appropriate only to professional clients.

Non-Deliverable Forward: Advantages and Disadvantages

NDF Forward Advantages and Disadvantages

NDF Forwards offer a useful means of protecting the value of balance sheet assets or liabilities which will remain over periods of time and included in financial reports. Sometimes translational currency risks can have a material impact on the value of balance sheet items and thus this form of currency hedging allows companies to protect and manage this risk.

The problems and risks of NDF Forwards include the added complexity of net settling the contract at expiry. The net settlement creates either a cash inflow or outflow. Often the underlying balance sheet item being hedged could be a non-cash asset. This means the company could incur cash losses from the NDF Forward hedges and synthetic translational gains from the asset revaluation. As a result, NDF Forwards are only appropriate to professional clients and all risk factors need to be fully understood before implementing such products into risk management strategies.

Regulated Trades – Cash Settled NDF Forwards and EMIR Reporting

Regulated NDF Forwards

When forward contracts are not delivered and instead cash settled at expiry, these products are regulated and fall within the scope of MiFID due to their added complexities and risks. These contracts will need to reported under EMIR.

European Market Infrastructure Regulation (EMIR) reporting helps to enhance the transparency of the derivative markets and reduces risks to financial stability.

It’s important to be aware companies will need a Legal Entity Identifier (LEI) to report regulated FX hedges.

At GSNFX, we can deal with these requirements on your behalf. As part of our standard service, we can register your legal entity identifier and ensure reporting is carried out in line with regulatory standards. Get in touch with our team to discuss your requirements in the first instance and find out more about how we can help companies manage all types of FX risks. We would first need to determine appropriateness and NDF Forward are available to professional clients.

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