A Non-deliverable forward (NDF) is a forward contract that is widely used in global foreign exchange markets. NDFs are settled in cash rather than through the physical delivery of currency, and are classified as OTC derivatives under the European Market Infrastructure Regulation (EMIR). The reporting obligations of EMIR aim to enhance transparency in EU markets and help regulators to monitor risk in the derivatives market.
What are Non-Deliverable Forwards (NDFs)?
An NDF is a cash-settled forward contract that allows two counterparties to lock in an exchange rate for a notional amount of foreign currency, with the settlement occurring in a convertible currency such as USD or EUR. Once the contract reaches its maturity date, the contract is settled by comparing the agreed forward rate with the prevailing spot rate, with the difference paid in cash by one counterparty to the other. Because NDFs do not involve the physical delivery of the underlying currency, they are popular in markets where certain local currency restrictions can prevent an actual exchange from taking place. Commonly traded NDF currencies include the Chinese yuan (CNY), Indian rupee (INR), Brazilian real (BRL) and Korean won (KRW) These instruments are typically used by banks, financial firms, asset managers and hedge funds to hedge currency risk or by investors to take speculative positions in restricted markets.
What are the EMIR Reporting Requirements for NDFs?
NDFs are considered to be a form of OTC FX derivative, making them eligible for the same EMIR reporting requirements as other FX derivatives.
What are the Reporting Obligations for NDFs Under EMIR?
Under EMIR, all trades must be reported to an authorised trade repository (TR) by the end of the following working day. Reporting obligations apply regardless of whether the NDF is being used for hedging or speculative purposes. Reports must include the following:
- Counterparty identification details by use of Legal Entity Identifiers (LEIs)
- Notional value and currency pair
- Time and date of the trade
- Agreed forward rate and valuation details
- Collateral data (if applicable)
Who is Responsible for Reporting NDFs Under EMIR?
Under EMIR Refit, reporting obligations depend on the classification of the counterparty:
- When a financial counterparty (FC) trades with a non-financial counterparty below the clearing threshold (NFC-), the FC is responsible for reporting on behalf of both parties
- NFCs above the clearing threshold (NFC+) must report their own trades
- When two NFCs trade, they must agree on who will submit the report.
Although delegated reporting is permitted, each counterparty remains legally accountable for the accuracy and completeness of any reports submitted in their name. NDFs are a core instrument in the FX derivatives market, providing access to restricted currencies and enabling effective risk management. Despite being cash-settled, they fall within the scope of EMIR as OTC derivatives. Firms engaging in NDF transactions must ensure that they meet their reporting obligations under EMIR in a timely and accurate manner, taking into account counterparty classification and evolving regulatory guidance under EMIR Refit. Novatus Global is here to support your transaction reporting obligations.
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