Bullish case grows for non-deliverable forward trading in Asia

Non-deliverable forwards are now at the forefront of mind for investors in the region after the pandemic, despite some regulatory concerns.
Bullish case grows for non-deliverable forward trading in Asia

Non-deliverable forwards (NDF) are gaining interest in Asia and the market will likely grow further as most Asian emerging market currencies are only partially convertible.

NDFs are foreign exchange forward contracts that help life insurers, multinational corporations, hedge funds and others manage currency exposures. They are notional forward transactions that are cash-settled made over the counter (OTC).

The NDF markets in many Asian emerging market currencies are large, rapidly growing, and often exceed onshore markets in transaction volume, an International Monetary Fund working paper published in September last year showed.

“For most emerging market currencies, NDF markets are likely to continue to flourish as long as full convertibility is not established,” according to Jochen M. Schmittmann and Chua Han Teng, authors of the IMF paper.

NDF markets are developed in response to restrictions that constrained access to onshore markets. Despite significant financial account liberalisation across Asia, most Asian emerging market currencies are only partially convertible and not deliverable offshore, making NDFs attractive alternatives to onshore markets, according to the paper.

Asia accounts for three of the top four NDF currencies by volume globally, according to the Bank for International Settlements (BIS) Triennial Central Bank Survey. The Indian Rupee, Korean Won, and New Taiwan Dollar accounted for 55% of total daily global NDF turnover of $258 billion as of April 2019, while onshore Renminbi accounts for another 5% of global NDF turnover.

They tend to price significant depreciation when the market went south. In the Covid-19 pandemic, implied interest rates and hence depreciation pressures spiked in the NDFs of several emerging markets, including India, Indonesia, Malaysia and Philippines.

However, the New Taiwan Dollar NDF implied interest rates declined far below onshore rates, suggesting appreciation pressures in the offshore market, thanks to Taiwan’s initial successful handling of the pandemic.

“Taiwanese investors, in particular life insurers, have built large overseas portfolios in recent years and increased currency hedges in the NDF market during the crisis. [This] could have contributed to lower implied NDF interest rates,” according to the report.

But there are still concerns to address. Schmittman and Teng said that spill-overs from NDFs to onshore markets are a policymaker concern, as exchange rate management could be less effective and the ability to conduct an independent monetary policy is crippled.

Policy approaches to NDFs also vary widely across Asia, ranging from close integration with onshore markets to severe restrictions on NDF trading.

For instance, Korea allows domestic financial institutions to participate in NDF trading and so the Korean Won NDF and onshore markets are closely integrated. In contrast, Malaysia authorities limit Malaysian Ringgit NDF trading while taking measures to deepen onshore foreign exchange markets. China is setting sight on the deliverable offshore Renminbi market.


At Finalto, the access to emerging currencies NDFs are offered to market players via its electronic trading systems and real-time reporting.

The product removes the operational issues that new entrants need to concern themselves with, such as fixing and settlement dates, allowing clients to concentrate on their market exposure. This also enhances the trend towards electronification of NDFs.

Finalto is a Tier 1 multi-asset provider of liquidity, technology and clearing services for OTC products. It aims to become a leading multi-asset institutional liquidity and prime brokerage specialist in the industry, powered by proprietary technology and inter-dealer partnerships.

In 2020, it expanded its presence in Asia-Pacific, with new operations in Australia and Singapore, demonstrating its commitment to the region.

The expansion allows clients to use effective hedging tools for trading OTC derivatives contracts and leverage products in line with regulations in respective countries. The products available are leveraged foreign exchanges, precious metals and energies, global stock indices, among others.

“We are committed to act with purpose to see our clients achieve success by providing proven alpha, innovative products and services, streamlining our practices and operations in order to ensure that the client experience remains a strong element of our value proposition,” a spokesperson from Finalto said.

Learn more about Finalto's offerings here.

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