Non-Deliverable Forward (NDF)

A non-deliverable forward (NDF) is a currency forward contract in which the two parties never exchange the currencies themselves. Instead, on the settlement date one side pays the other the difference between the agreed forward rate and an official reference rate, called the fixing, in a freely convertible currency, almost always the US dollar. NDFs are used to hedge or take positions in currencies that cannot easily be moved or delivered offshore, such as the Indian rupee, Korean won, New Taiwan dollar and Brazilian real.

They exist because some governments restrict offshore holding or trading of their currency through exchange controls or broader capital controls. An ordinary deliverable forward ends with both currencies changing hands; an NDF ends with a single net cash payment. NDFs trade over the counter, mainly in London, Singapore, Hong Kong and New York.

Imagine two friends betting on the price of a rare concert ticket that only residents of one city are allowed to buy. Neither friend can get the ticket, so they agree on a price today and promise to settle up later in cash, based on the price the official box office announces on a set date. If the official price ends up higher, one friend pays the other the difference; if lower, the payment goes the other way.

An NDF works the same way for currencies. A company abroad that will receive Indian rupees, or an investor holding Korean shares, can protect itself against currency swings without touching the restricted currency at all. The only money that moves is the difference, paid in dollars, once the official rate is published, so the hedge works even though the currency itself never leaves its home market.

The parties agree on a notional amount, a forward rate, a fixing date and a settlement date. On the fixing date, usually two business days before settlement for most Asian currencies, the official reference rate is observed. Standard terms, including which fixing source applies and what happens if it is not published, are set by templates from EMTA, the trade association for emerging markets, and definitions from ISDA. Common fixing sources include:

• Indian rupee. The reference rate published by Financial Benchmarks India (FBIL), linked to the Indian rupee onshore market.
• Korean won. A market average rate published in Seoul for the South Korean won.
• New Taiwan dollar. A fixing from the Taipei interbank market for the New Taiwan dollar.
• Brazilian real. The PTAX rate published by the Central Bank of Brazil for the Brazilian real.

For a contract on a notional amount in dollars, with rates quoted as units of local currency per dollar, the dollar settlement paid to the buyer of dollars is:

• $N$ is the notional amount in US dollars.
• $S$ is the fixing rate on the fixing date.
• $F$ is the forward rate agreed when the contract was made.

A positive result is paid by the seller of dollars to the buyer; a negative result is paid the other way. For example, a company buys USD 10 million against rupees one month forward at 84.00. The rupee weakens and the fixing is 85.20. The settlement is $10{,}000{,}000 \times \frac{85.20 - 84.00}{85.20} \approx 140{,}845$ dollars, paid to the company. That gain offsets the higher rupee cost of the dollars it must buy in the onshore spot market.

Exporters and importers use NDFs for hedging receivables and payables in restricted currencies, and foreign portfolio investors hedge local stocks and bonds. Borrowers with foreign currency debt may use them where onshore hedges are limited. Hedge funds also use NDFs to take views on emerging currencies. Because offshore and onshore prices can diverge, central banks watch NDF rates as a signal of market expectations and pressure on the currency.

The BIS Triennial Survey for April 2025 found that NDF turnover kept growing overall, though the pattern differed by currency: the offshore renminbi market has largely replaced yuan NDFs with deliverable contracts, while NDFs remain central for currencies such as the rupee and won.

In the United States, the Treasury's November 2012 determination exempted deliverable FX swaps and forwards from most Dodd-Frank swap rules, but NDFs were not covered, so they are regulated as swaps by the Commodity Futures Trading Commission, with reporting and, for many firms, margin requirements. In the EU they fall under EMIR. Some jurisdictions have also opened their markets: the Reserve Bank of India allowed banks with units in the International Financial Services Centre to deal in rupee NDFs with non-residents from 1 June 2020, and in 2023 let them offer such contracts to residents.

The main risks are counterparty risk, managed through collateral and central clearing, and basis risk when the fixing differs from the rate a hedger actually trades at. Disruption events, such as a fixing not being published or new controls, are handled by fallback provisions in the standard templates. NDFs are traded over the counter and are part of the wider OTC derivatives market.

• EMTA: The Trade Association for the Emerging Markets
• US Department of the Treasury: Determination of Foreign Exchange Swaps and Forwards (Federal Register, 2012)
• Bank for International Settlements: Triennial Central Bank Survey 2025