|Non-deliverable forwards (NDFs)|
|European Union Electricity Market Glossary|
Pursuant to the ESMA Consultation Paper, Clearing Obligation under EMIR (no. 3) ESMA/2014/1185 of 10 October 2014 non-deliverable forwards (NDFs) "are cash-settled foreign exchange forward contracts. Such a cash-settled forward contract specifies an exchange rate against the currency of delivery (the convertible currency), typically the US dollar, a notional amount of the non-convertible currency and a settlement date. A cash-settled FX forward contract is akin to a classical physically-settled FX forward contract, but with the former there is no physical delivery of the designated currencies at maturity. On the settlement date, the spot market exchange rate is instead compared to the forward rate and the cash-settled contract is settled on a net basis, in the convertible currency based on the notional amount."
As the above document also explains, the NDF market "has traditionally developed because of some legal or regulatory constraints preventing the offshore settlement of transactions in certain currencies. In some countries, the monetary authorities impose restrictions on the convertibility of their currency to regulate the inflow and outflow of currencies. Therefore, it may be difficult for counterparties located outside those countries to enter into physically-settled FX forward contracts because such transactions might not be allowed under the currency restrictions. As a result, the demand has grown for non-deliverable forwards, which do not require any payment in the non-convertible currency."
"Non deliverable forwards are contracts for the difference between an exchange rate agreed before and the actual spot rate at maturity and therefore should not be considered to be spot contracts, regardless of their settlement period" (Recital 12 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive).
|Last Updated on Thursday, 20 April 2017 21:40|