United States: Non-Deliverable Forward Foreign Exchange Contracts At A Glance

Last Updated: March 8 2013
Article by Chudozie Okongwu, PhD and Esther Bruegger, PhD


Exposure to foreign exchange rate risk is often hedged with forward foreign exchange ("FX") contracts, which fix an exchange rate now for settlement at a future date. The parties to an FX forward agree to buy or sell a currency at a specified exchange rate, at a specified quantity and on a specified future date. On the specified future date, the two parties exchange the currency amounts to settle their claims under the contract.

Some countries' monetary authorities impose restrictions on their currency's convertibility in order to regulate the currency's inflow and outflow. As a consequence, offshore parties can face difficulty hedging their exposure with forward contracts as such transactions might not be allowed under the currency restrictions. As a result, markets for non-deliverable forwards, which do not require the exchange of the non-convertible currency, have developed.

A non-deliverable forward foreign exchange contract ("NDF") is similar to a regular forward FX contract but does not require physical delivery of the designated currencies at maturity. Instead, the NDF specifies an exchange rate ("contracted forward exchange rate" or simply "forward rate") against a convertible currency, typically the US dollar (USD), a notional amount of the non-convertible currency and a settlement date. On the settlement date, the spot market exchange rate is compared to the forward rate and the contract is net-settled in the convertible currency based on the notional amount. The manner in which the spot rate is determined is agreed upon at the initiation of the contract and varies by currency and jurisdiction. This might be the daily rate published by the central bank of the non-convertible currency or an industry group reference benchmark which is typically an average of rates from several banks and FX dealers. NDFs are traded primarily in over-the-counter markets and are cash-settled in the convertible currency. Since March 2012, NDFs can also be cleared through several exchanges such as the CME, the ICE, and ForexClear.

As an example, suppose that an American company, Company A, will receive IDR 10,000,000,000 (Indonesian Rupiah) three months from today as a result of an investment in Indonesia. Upon receipt, Company A is planning to convert the payment into USD at the then available spot rate; Indonesian authorities permit this spot market transaction because of the underlying investment. In contrast, no deliverable forward FX contracts are available for IDR, so in order to hedge the exchange rate risk between IDR and USD, Company A enters into an NDF with a bank in Singapore. The NDF contract specifies a notional of IDR 10,000,000,000, a maturity of three months, and the agreed upon forward rate of 9,870 which equals the current spot rate (IDR 9,870 = USD 1). The spot rate for IDR is set by the Associations of Banks in Singapore ("ABS"), which calculates the rate based on data submitted by banks (using a process similar to the one used to calculate LIBOR and other global reference benchmarks). Suppose that three months later, at maturity, this spot rate is 10,201. The close-out payment of the NDF is calculated as:


The NDF market began to grow in the early 1990s, focused mostly on emerging market currencies in Latin America. Because NDF trading was primarily used as a means to hedge exchange rate risk for non-convertible currencies, market growth has been greatest for currencies of countries with increasingly active investors (portfolio and/or foreign direct investment) and countries with uncertain exchange rate regimes. NDF markets in currencies that were becoming increasingly convertible have dissipated or disappeared. Throughout the 1990s, increasing investments in emerging markets in Asia and Eastern Europe further expanded the NDF market. By 1997 the International Swaps and Derivatives Association added provisions for NDF transactions to its definitions.

Risks of NDFs

A party to an NDF is exposed to various risks, most importantly the risk that the spot rate moves above or below the forward rate in the contract. Parties using NDFs to speculate or to hedge another asset willingly assume this risk; their exposure to spot rate movements is the purpose of entering an NDF. Major financial institutions are primarily involved in the NDF markets through their market-maker activities. They frequently offset the risk assumed through the broker market, with other banks and onshore market participants and exchanges. This implies that these market-making firms are exposed to basis riskâ€"the risk that offsetting contracts might settle at different rates in the event of a disruption. Finally, NDFs are not considered to have emerging market country risk or sovereign risk, but are subject to counterparty risk if not centrally cleared through an exchange.

NDFs, when used as a hedging instrument, have additional risks which need to be considered. The main risk concerns the spot rate at which the contract settles. As explained above, this rate is often a rate posted by onshore authorities or offshore organizations and there is no guarantee that NDF parties will actually be able to convert their onshore currency at that rate. In particular, in times of market crisis or when a change in exchange rate regime is increasingly likely, the likelihood that the NDF fixing rate is an indication of where the spot market is trading may be significantly diminished. This may affect the usefulness of NDFs as a hedging product because protection from the contracts would be most desired during episodes of market distress.

Recent Developments

As mentioned above, the process for determining the spot rate varies by currency and jurisdiction. For some currencies, the market exchange rate is determined using a similar process to that which determines LIBOR. For example, the reference rates for the Indonesian rupiah, Malaysian ringgit, Singapore dollar, and Thai baht are overseen by the ABS. For these currencies the ABS collects quotes from a panel of participating banks, excludes a proportion of the highest and lowest bids, and averages the remaining values to determine the spot rate.

Probes into the recent LIBOR rigging scandal have raised concerns that spot rates on NDF contracts might also have been manipulated for some currencies, including the Malaysian ringgit and the Indonesian rupiah. The concerns are that traders could have attempted to move spot rates in order to profit when settling NDFs carried on their books. In the summer of 2012 the Monetary Authority of Singapore ("MAS") instructed banks to review their processes to set foreign-exchange rates used to settle certain currency forward contracts. As of November 2012, both UBS and RBS had suspended Singapore-based FX traders following internal probes into the manipulation of NDF rates and pending an investigation into the manipulation of the NDF spot rates by the MAS. Citigroup is also being investigated.1 In January 2013, a Reuters news article cited an unnamed source with knowledge of the inquiries and reports and stated that the probes found evidence showing that traders from several banks colluded to fix NDF rates in order to benefit their trading books.


1. BusinessWeek, "Citigroup Says Singapore Monetary Authority Probes Rates," 6 November 2012.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.