Non-Deliverable Forwards (NDF)

Companies that earn revenue in a currency whose delivery abroad is restricted use NDFs to hedge currency risk.

Settling only the difference

A non-deliverable forward (NDF) is a transaction in which one of two parties pays the other the difference between the agreed exchange rate and a rate set before settlement, multiplied by the notional amount. The principal amounts of the two currencies are not delivered, and the trade settles in a single currency, usually the US dollar¹. The rate used to set the difference is called the fixing. It is a rate published on the valuation date (the day the difference is set) that is close to that day's spot exchange rate. This page calls the rate agreed in an NDF the contract rate.

Because an NDF does not deliver currencies, you can use it to hedge currency risk even in currencies whose delivery abroad is tightly restricted, or whose forward market is underdeveloped². The general case of trades that deliver the principal is covered in FX Forwards.

Consider a fictional example of a company with rupee revenue. Company D plans to convert 840 million rupees into dollars in three months. It enters into an NDF with Bank E. The notional amount is USD 10 million and the contract rate is 84.00 rupees per dollar. Company D sells rupees and buys dollars under the NDF, and Bank E buys rupees and sells dollars. The notional amount converted into rupees at the contract rate is 840 million rupees. The Indian rupee was chosen because template terms for NDFs (see a later section) exist for it.

Setting the difference with the fixing and paying in dollars

To find the settlement amount, multiply the difference between the fixing and the contract rate by the notional amount to get the difference in rupees, then convert it into dollars at the fixing. With the notional amount as $N$ (in dollars), the contract rate as $F$, and the fixing as $S$ (both in rupees per dollar), the amount received by Company D, the rupee seller, is:

$$\text{Company D's receipt (dollars)} = N \times \frac{S - F}{S}$$

When the value is negative, Company D pays that amount to Bank E. Bank E's payment or receipt is the same amount in the opposite direction. Under the example's terms, the settlement amount for each fixing is as follows.

If the fixing is 87.50 rupees, the difference in rupees is USD 10 million × (87.50 − 84.00) = 35 million rupees. Dividing this by 87.50 gives USD 400,000, which Bank E pays Company D. If the fixing is 80.00 rupees, the difference is −40 million rupees, and dividing by 80.00 gives USD 500,000, which Company D pays Bank E. The weaker the rupee, the more Company D receives, and the stronger the rupee, the more Company D pays³.

Figure description

The curve shows the dollar difference Company D receives on the settlement date (a negative value is a payment) for each fixing on the valuation date. It is zero when the fixing equals the contract rate, a receipt on the weaker-rupee side (right) and a payment on the stronger-rupee side (left). The line is not straight: it flattens toward the right, because the rupee difference is divided by the fixing to convert it into dollars. No principal is exchanged, so only this difference is drawn.

Deep diveThe settlement formula and a trade that delivers principal

You can think of the example NDF as a trade in which, on the settlement date, Company D hands over 840 million rupees and receives USD 10 million, with the delivery of principal removed so that only the difference remains. If the principal were delivered, the 840 million rupees Company D hands over would be worth USD 9.6 million at a fixing of 87.50 rupees, and the difference from the USD 10 million it receives would be USD 400,000. As a formula, this is the dollars received minus the dollar value of the rupees handed over, which matches the formula in the main text.

$$N - \frac{N \times F}{S} = N \times \frac{S - F}{S}$$

The rupee difference is divided by the fixing because the settlement currency is the dollar, so the difference is converted into dollars before it is paid.

Valuation date, settlement date and how the fixing is set

Industry bodies have drawn up template terms for NDFs in each currency. EMTA (formerly the Emerging Markets Traders Association), an industry body for emerging markets, has prepared documentation to support NDF trading in emerging market currencies. This work began with the "1998 FX and Currency Option Definitions," published jointly by EMTA and the International Swaps and Derivatives Association (ISDA) in 1998. The documentation includes template terms, user's guides, and forms for amending agreements⁴. Some templates were prepared jointly with the Singapore Foreign Exchange Market Committee (SFEMC)⁵. The template for the Indonesian rupiah (2014), issued in the names of SFEMC, EMTA and the Foreign Exchange Committee (FXC), is also posted on the website of the Federal Reserve Bank of New York⁶.

The Indian rupee template, effective July 10, 2018, sets the main terms as follows⁷.

The rule for moving the valuation date is a type of business day convention. If the fixing is not published (a disruption at the rate's price source), the fallbacks in the last row of the table apply in order, and the number of days by which valuation is postponed, counted together with unscheduled holidays, may not exceed 14 days. The Indonesian rupiah template is built the same way. Its fixing is IDR JISDOR (IDR04), published at about 10:00 a.m. Jakarta time on the valuation date⁶. The Indian rupee and Indonesian rupiah templates share the same structure and differ in the fixing source, the publication time, and the cities that set business days.

In 2023, EMTA and ISDA began discussing a full update of the 1998 definitions, and industry work has been under way since 2024. The goal is to bring the provisions of the EMTA templates into the new definitions and complete the transition by 2027. As a result, on the EMTA website as of September 2026, materials such as the templates that were previously posted have been removed and archived, or kept and marked as being for historical reference⁴.

Hedging for a company that receives rupees

Even without delivering principal, an NDF can lock in the combined result with the hedged item at the contract rate. Company D in the example plans to convert 840 million rupees into dollars in India in three months. Here, assume that Company D can convert rupees into dollars at the same rate as the fixing, and add the converted dollars to the NDF payment or receipt.

If the rupee weakens to 87.50, the dollars from converting the rupees fall to 9.6 million, but Company D receives USD 400,000 under the NDF, for a total of USD 10 million. If the rupee strengthens to 80.00, the dollars from converting the rupees rise to 10.5 million, but Company D pays USD 500,000 under the NDF, and the total is again USD 10 million. Through the NDF, Company D gives up the 500,000-dollar gain it would have had without it. If the rate at which the rupees are actually converted differs from the fixing, the total moves away from USD 10 million by that difference.

Currencies and markets where NDFs trade

NDFs are used for emerging market currencies in Asia, Latin America and elsewhere. Looking at the change from 2016 to 2019 in the Bank for International Settlements survey, turnover in Asian currencies against the dollar grew because trading in FX swaps and NDFs increased, as well as spot trading. In Singapore and Hong Kong, high-speed, high-frequency electronic trading is increasingly offered for FX swaps and NDFs as well⁸. EMTA has issued forms for amending trade terms and guides for NDFs in currencies such as the Brazilian real, Chilean peso, Colombian peso, Peruvian sol, Philippine peso, Chinese yuan and Russian ruble⁴.

NDFs are OTC derivatives that do not go through an exchange⁹, and some are cleared through a central counterparty. According to an overview of ForexClear, the clearing service of the UK clearing house LCH (April 2024), 25 NDF currency pairs can be cleared: 15 emerging market pairs and 10 major currency pairs. For NDFs cleared in January to March 2024, the pairs with the largest notional amounts were as follows, in descending order. They were the dollar and Indian rupee (USD/INR, USD 1.594 trillion), the dollar and Taiwan dollar (USD/TWD), the dollar and Korean won (USD/KRW), the dollar and Brazilian real (USD/BRL), and the dollar and Indonesian rupiah (USD/IDR)¹⁰.

Settlement and credit risk, and US regulation

Because an NDF pays only the difference, its settlement amount is smaller than that of a trade that delivers principal, which reduces settlement risk (the risk that one party pays but does not receive payment from the other)². In the example, a trade that delivers principal would exchange USD 10 million for 840 million rupees, while the NDF needs only a payment of 400,000 or USD 500,000. The credit risk of the counterparty until the settlement date and the market risk from rate moves still remain. Swaps, including FX derivatives, generally carry three risks: counterparty credit risk before settlement, market risk, and settlement risk¹¹. Clearing through a central counterparty reduces counterparty credit risk, because the central counterparty becomes the counterparty to the trade¹⁰.

In the United States, the Dodd-Frank Act included FX swaps and FX forwards in the swap definition of the Commodity Exchange Act, and allowed the Secretary of the Treasury to exempt them by making a determination. The Secretary issued this determination in November 2012, and FX swaps and FX forwards were removed from obligations such as mandatory clearing and exchange trading. NDFs, on the other hand, settle in a single currency without exchanging two currencies, so they do not meet the statutory definition of an FX forward and are not covered by the determination. The US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) include NDFs in the definition of a swap¹².

Differences from FX forwards

NDFs and FX forwards both protect against exchange rate moves by locking in an agreed rate. They differ in how they settle and how regulation treats them.

Because an FX forward actually delivers the principal of both currencies, it is hard to use for currencies whose delivery abroad is restricted. An NDF lets you pay or receive in dollars only the amount of the rate move, even in those currencies.

Notes

1. U.S. Department of the Treasury, "Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act" (November 20, 2012), page 69703. ↩

2. Bank of Japan, "アジアにおける外為市場の近年の特徴点について" (Bank of Japan Review 2020-J-5, July 2020, in Japanese), footnote 7 (page 6). An English version is available: "Recent Characteristics of FX Markets in Asia —A Comparison of Japan, Singapore, and Hong Kong SAR—" (Bank of Japan Review 2020-E-3, July 2020), footnote 7 (page 6). ↩ ↩²

3. This page derived the formula from how the U.S. Treasury determination sets the difference (page 69703) and from the fields of the Indian rupee template (note 2). ↩

4. EMTA, Inc., "FX and Currency Derivatives Documentation," the "History" paragraph at the top of the page, and the lists under "USER'S GUIDES AND GUIDANCE NOTES" and "MULTILATERAL AMENDMENTS AND DOCUMENTATION PROTOCOLS." ↩ ↩² ↩³

5. Singapore Foreign Exchange Market Committee website, top of the page. ↩

6. Foreign Exchange Committee, "SFEMC, EMTA & FXC Template Terms for IDR/USD Non-Deliverable FX Transactions" (final draft of March 4, 2014), General Terms and note 3. The name FXC follows the usage in note 30 (page 69697) of the same Treasury determination. ↩ ↩²

7. EMTA, Inc., "SFEMC & EMTA Template Terms for INR / USD Non-Deliverable FX Forward Transactions" (effective July 10, 2018), General Terms, Other Terms, and notes 2 and 3. ↩ ↩²

8. Bank of Japan, "アジアにおける外為市場の近年の特徴点について" (Bank of Japan Review 2020-J-5, July 2020, in Japanese), page 3 and Chart 6. An English version is available: "Recent Characteristics of FX Markets in Asia —A Comparison of Japan, Singapore, and Hong Kong SAR—" (Bank of Japan Review 2020-E-3, July 2020), page 3 and Chart 6. ↩

9. Federal Reserve Bank of New York, "The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2025," the opening (page 2 of the PDF) and Annex I (page 12). ↩

10. LCH Limited, "ForexClear overview" (April 2024), "ForexClear at a glance," "Top 5 FX non-deliverable currency pairs," and "Why should you clear?" ↩ ↩²

11. The same determination (November 20, 2012), "I. Summary of Final Determination" (page 69694). ↩

12. The same determination, "SUPPLEMENTARY INFORMATION" (page 69694), "I. Summary of Final Determination" (page 69695), and "C. Implications of Determination; Treatment of NDFs" (pages 69703–69704). ↩