What is foreign exchange control?
Foreign exchange control refers to the rules and regulations that govern the exchange of currencies in a given country, state, or region. These regulations aim to manage the balance of payments, regulate the economy, control the value of a currency and protect parties that engage in the exchange of a specific currency.
Managing the inflow and outflow of currencies also ensures that the exchange rate is monitored and kept relatively constant when needed, with a view to keeping the economy stable. Countries with transitional economies which are undergoing economic reforms can institute exchange control to prevent speculation. These controls may limit the use or possession of a foreign currency or ban it altogether. The government will determine how the foreign currencies earned by individuals and businesses are spent. Some make it mandatory for all earned foreign currencies to be sold at the central bank at a predetermined exchange rate.
Foreign Exchange Controls in the Philippines
The Bank of the Philippines regulates the financial activities and policies, while the Securities and Exchange Commission regulates the forex brokers that operate in the country. These regulations help to manage the flow of currencies across the national borders and allow the state to fine-tune the policies that impact the Philippine Peso domestically. Here are five notable foreign exchange controls in the Philippines
1 Scope of Regulations
There are many rules and regulations governing the purchase of foreign currencies in the Philippines. These include forms, documentation, and other requirements of banks and governmental institutions. However, these regulations only apply to transactions funded by the Philippine Pesos. This means that individuals and companies who need to purchase foreign currencies don’t need to present any documents if the transaction is funded by another foreign currency. The forex regulations in the Philippines prioritize the control of transactions involving the Philippine Peso because this allows them to stabilize and control the currency’s value.
2 Know Your Customer Policy
The bank of the Philippines stipulates some information that must be presented by individuals who need to carry out foreign exchange transactions. The information is contained in the KYC(know your customer) policy and includes the key details of any party, company, or organization that wishes to exchange foreign currencies.
Besides the KYC information, the transactions should comply with any other applicable laws and regulations.
3 Residents’ Ownership of Foreign Currency
The forex control In the Philippines allows residents to hold and own foreign currencies freely. Citizens in the Philippines earn these currencies from a variety of sources; exports, international trades, the gig economy, and services. Any dividends or profits from international investments can be obtained and kept without any restrictions in foreign currency accounts. Residents who don’t have foreign currency accounts can exchange the currencies for Philippine pesos and store them in a regular bank account. This policy is extensively beneficial because it encourages commerce, international trade, and service provision. It also increases the inflow of foreign currencies and provides room for the exchange rates of these currencies to be monitored.
4 Authenticity of Submitted Documents
Before purchasing foreign currency from any financial institution in the Philippines, you need to submit the relevant documents to the bank in question. This is a key component of the verification and regulation processes. Additionally, you must confirm the authenticity of the documents presented. The details entered into several documents must correspond with one another and be submitted through the official channel or authorized personnel. Of course, the hard copy of your documents can remain with the individual or trader, but these must be presented to the authorities when needed.
5 Regulation of Forex Brokers
Forex brokers are important actors in the foreign exchange space because they allow traders to buy and sell currencies with instantaneous execution and trade management. The Securities and Exchange Commission (SEC) regulated forex brokers in the Philippines. All brokers that operate in the country are required to follow the rules, regulations, and guidelines specified by the SEC. Companies that fail to meet these criteria would not be licensed to facilitate currency trading in the Philippines. Companies that have been licensed have to remain compliant with the regulations or else, their licenses can be suspended or canceled.
The bank of the Philippines may not regulate brokers directly, but it still ensures that the economic stability of the country is maintained while the value of the Philippine peso is controlled meticulously.
5 Reasons Why Foreign Exchange Controls Exist
1 Economic Restructuring
The value of a currency can affect the economic and monetary decisions of a country. As an emerging economy, the Philippines uses foreign exchange regulations to control the demand and supply of its currency. This helps to make other decisions and policies like interest rates and the competitiveness of their exports on a global scale.
2 Balance of Payment Deficit
A balance of payments deficit means the country imports more services, goods, and capital than it exports. Countries with a balance of payment deficit may need to borrow from others to offset the debt. But, the buying power of a currency and its value on an international scale can be used to adjust the balance of payment.
3 Control of Capital Flight
Capital flight occurs when financial assets and capital are moved out of a country due to instability, lack of trust, and devaluation of the currency. Local currency fear can discourage investments and this can be curbed by domestic control of foreign exchange transactions.
4 Institution of Reactionary Policies
The regulation of a local currency and foreign currency inflow helps a country to easily adjust in times of uncertainty such as war or instability.
5 Fostering Secure Transactions
Foreign exchange transactions are more secure when the transactions are overseen by relevant authorities.
This protects the interest of all parties involved in the transaction and prevents the abuse of the trading platforms, and the opportunity to exchange foreign currencies.
Effects of Foreign Exchange Control on Forex Trading
1 It Influences Currency Prices
The Central banks and forex control authorities primarily protect the country’s currency as a way of stabilizing the economic activities locally. It creates monetary policies and exchange rate policies that influence the value of a currency in the forex market. For example, some countries peg their currencies to others as a way of stabilizing them. These kinds of policies are made to control and manage the exchange rate, thereby affecting the demand and supply of the currency in question.
2 Regulates Trading Platforms
Foreign exchange control is usually extended to the trading platforms that allow the exchange of currencies. These platforms may be forex brokers or futures exchanges. The goal is to make sure these platforms adopt the best practices and maintain the specified exchange rate. Having a uniform exchange rate across several platforms helps a country to set, maintain and enforce the predetermined value of the currency. This affects forex traders that use the platform because traders have to exchange currencies based on the set rate.
3 Affects Monetary and Economic Policies
The forex market is highly responsive to news and economic data being released daily. For example, the interest rate of a country is an indirect way of controlling the demand and supply of a currency. The interest rate affects borrowing, investments, and the competitive advantage of a country’s goods. The release of these data doesn’t just affect the currency prices but influences the trading decisions and choices of forex traders around the world.
Learn more about foreign exchange controls and try out Decode Global today
Now that you know what forex control means and how it affects the forex market, you can open a forex trading account on a forex trading platform and start executing trades today!