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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions