NDF Markets in Asia: How Non-Deliverable Forwards Work for Businesses Operating in Restricted Currencies

When a currency cannot be freely converted or freely traded offshore due to capital controls — as is the case for Chinese renminbi (CNY), Indian rupee (INR), Korean won (KRW), Indonesian rupiah (IDR), and several other Asian currencies — businesses with exposure in those currencies face a fundamental challenge: they cannot hold or deliver the currency outside its home jurisdiction, but they still bear meaningful P&L risk from exchange rate moves.

Non-Deliverable Forwards (NDFs) were developed specifically to solve this problem. An NDF provides the economic benefit of a forward contract — locking in an exchange rate for a future date — without requiring physical delivery of the restricted currency. Settlement is made in a freely convertible currency (typically USD) based on the difference between the contracted forward rate and the prevailing spot rate at maturity. For businesses operating in Asia's restricted currency markets, NDFs are not an exotic derivative — they are a practical treasury necessity.

NDF Mechanics

An NDF has four key terms:

• Notional: the amount of the restricted currency being hedged (e.g., CNY 10,000,000)
• Forward rate: the agreed exchange rate for the hedge (e.g., USD/CNY 7.25)
• Fixing date: two business days before settlement, the official rate is "fixed" against a published reference (e.g., PBOC daily fix for CNY, RBI reference for INR)
• Settlement currency: USD (almost universal for Asian NDFs)

At the fixing date, if the published reference rate is USD/CNY 7.35 and the contract rate was 7.25, the business selling CNY forward (protecting against CNY depreciation) receives a settlement payment of: (7.35 − 7.25) / 7.35 × notional in USD. The business receives the economic benefit of CNY depreciation protection without ever delivering or receiving CNY outside China.

The Key Asian NDF Markets

USD/CNY (Offshore CNH vs. NDF)

China is unique in having both an onshore (CNY) and offshore (CNH) renminbi market. CNH is physically deliverable and trades in Hong Kong with deep liquidity — for most corporate purposes, CNH forwards are preferable to NDFs because they have tighter spreads and align more directly with commercial flows through Hong Kong. USD/CNY NDFs remain relevant for entities that cannot access CNH markets or for speculative/hedging positions that reference the PBOC's daily fix specifically.

USD/INR

India's rupee NDF market is centred in Singapore and London. The RBI has taken incremental steps toward allowing onshore INR forward access for foreign entities, but offshore NDFs remain the primary hedging instrument for non-resident businesses with INR exposure. The reference rate is the RBI's reference rate, published at approximately 12:30pm IST daily. USD/INR NDF spreads at 1-month are approximately 5–8 pips — modestly wider than the onshore deliverable forward market but accessible 24 hours, unlike the onshore market.

USD/KRW

The Korean won NDF market is liquid and important for businesses involved in Korean trade, particularly technology supply chains. The Financial Services Commission (FSC) and Bank of Korea (BOK) have been gradually expanding non-resident access to the onshore FX market, and a shift toward greater KRW convertibility is underway — but NDF remains dominant for international hedging. Reference: Seoul Money Brokerage Services (SMBS) fixing.

USD/IDR, USD/PHP, USD/TWD

These three form the secondary tier of Asian NDF markets. Each is liquid enough for institutional hedging purposes but carries wider spreads than CNY/INR/KRW. The fixing references are Bank Indonesia's BI rate for IDR, Bangko Sentral ng Pilipinas for PHP, and Taipei foreign exchange market rates for TWD.

NDF vs. Deliverable Forward: When to Use Each

• Use deliverable forward: when the currency has a liquid, accessible offshore deliverable market (MXN, BRL, ZAR, PLN, SGD). Lower spreads, physical currency delivery allows operational use of the hedged currency.
• Use NDF: when the currency is subject to capital controls (CNY/CNH for onshore flows, INR, KRW, IDR, PHP) and physical delivery outside the home jurisdiction is restricted or impractical. Also appropriate where the hedge is purely a financial P&L protection rather than linked to a specific physical currency requirement.

EMIR and NDF Reporting

NDFs are classified as FX derivative contracts under EMIR, subject to trade repository reporting (under UK EMIR post-Brexit) for both counterparties above the de minimis threshold. UK NFC- entities benefit from delegated reporting through their financial counterparty (the NDF provider), eliminating most of the compliance burden. However, businesses using NDFs should ensure they have documented the commercial exposure underlying each NDF contract — the FCA expects NDFs used by non-financial businesses to be linked to genuine commercial exposure, not speculative positions.