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Non-Convertible Currencies and Non-Deliverable FX Markets

Article Quant Q&A · Author: Student
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Summary

The document distinguishes a currency’s convertibility from whether an FX contract delivers the currency. A currency may be difficult or restricted to convert because of capital controls or limited market access, while a non-deliverable forward settles its value without exchanging the underlying currency. NDFs are used where physical delivery is thinly traded or where the currency is non-convertible.

The answer notes that convertibility is not always an all-or-nothing condition: some currencies can be converted through onshore banks even when access is difficult, and NDFs may still trade readily. It also contrasts those markets with a less accessible currency for which an NDF required privately agreed terms and fixing procedures. Thus, non-deliverability in market usage concerns the availability and accessibility of NDF trading, not simply the legal convertibility status. The examples are practitioner observations rather than a comprehensive classification, and operational details can vary by currency and counterparty.

Key ideas

  • Convertibility concerns the ability to exchange a currency; delivery describes how an FX contract settles.
  • NDFs can be used when physical currency delivery is thin or conversion is restricted.
  • Some currencies remain convertible through onshore banks even when access is difficult.
  • NDF accessibility varies, and bespoke contracts may require agreement on fixing and settlement details.

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# What is the difference between a non-convertible and a non-deliverable currency?


# What is the difference between a non-convertible and a non-deliverable currency?












it seems non convertible (eg CNY) or partially convertible (eg BRL) may be due to capital controls or a currency only used domestically. I was then wondering what is the difference between a non-convertible and a non-deliverable currency?

## Answer by Dimitri Vulis (score 2)

https://quant.stackexchange.com/a/61911

(A good book on emerging markets FX is:

https://www.amazon.com/Trading-Fixed-Income-Emerging-Markets-dp-1119598990/dp/1119598990/ https://www.wiley.com/en-us/Trading+Fixed+Income+and+FX+in+Emerging+Markets%3A+A+Practitioner%27s+Guide-p-9781119598992 Dirk Willer, Ram Bala Chandran, Kenneth Lam. Trading Fixed Income and FX in Emerging Markets - A Practitioner's Guide. Wiley 2020 . Disclaimer - I may know them.)

Also Credit Suisse EM Currency Handbook (2013) may help.

Currencies are traded as NDFs either because the physical delivery is thinly traded or because the currency is non-convertible.

Non-convertible is not always absolute. For example, Brazil reais BRL are convertible through onshore banks (not easy). Chilean peso (CLP) and Colombian peso (COP) are non-convertible. For all 3 example, it is easy to trade NDFs.

Likewise in Asia, it is easy to trade NDFs on Indian rupee INR, Indonesian rupiah IDR, Taiwan Dollar TWD, Philippine peso PHP, South Korean Won KRW.

But, for example, the desk where I worked once (exactly) needed to do a Paraguayan Guarani PYG NDF. You cannot find it on the usual venues. There is no standard EMTA template. But as long as you have a counterpary, and agree on technical detals, like how you will observe the fixing, you can do over the counter contracts. But this was not easy operationally. Non-delivery currency means that the NDF market is easily accessible.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.