Offshore Currency Markets: Non-Deliverable Forwards (NDFs) in Asia

IMF Working Papers, September 4, 2020

Source details

Canonical URL: Offshore Currency Markets: Non-Deliverable Forwards (NDFs) in Asia

Non-deliverable forward (NDF) markets in many Asian emerging market currencies are large, rapidly growing, and often exceed onshore markets in transaction volume.
NDFs tend to price significant depreciation during market stress episodes including COVID-19.
Spillovers from NDFs to onshore markets are a policymaker concern.
Influences tend to run both ways between NDF and onshore markets after controlling for differences in timezones between markets.
For the COVID-19 pandemic there is some evidence of NDFs leading onshore markets for a few currencies.
Policy approaches to NDFs vary widely across Asia from close integration with onshore markets to severe restrictions on NDF trading.

NDF markets often exceed onshore markets in transaction volume for many Asian emerging market currencies.
NDF pricing reflects significant depreciation during market stress episodes, including the COVID-19 episode.
Bidirectional spillovers: analysis indicates influences run both ways between NDFs and onshore markets when accounting for timezone differences.
COVID-19 specific finding: some evidence that NDFs led onshore markets for a subset of currencies during the pandemic.

Policymaker concern: spillovers from offshore NDF markets to onshore markets can affect domestic currency stability.
Policy frameworks across Asia are heterogeneous:
- Some jurisdictions pursue close integration between onshore and offshore markets.
- Other jurisdictions impose severe restrictions on NDF trading.
Implication: policy responses must consider market linkages, timing differences across timezones, and the potential for offshore pricing to influence onshore valuations during stress episodes.

Source: IMF Working Paper "Offshore Currency Markets: Non-Deliverable Forwards (NDFs) in Asia" (September 4, 2020)