How do offshore NDFs transmit exchange rate pressure to Asia's markets?

Offshore Trading Moves Onshore Rates

A working paper published by the Bank for International Settlements (BIS) on 16 October 2026 analyses how trading in offshore non-deliverable forward (NDF) markets affects domestic currency exchange rates in emerging economies.

Authored by Gerardo Ferrara, Andreas Schrimpf, Ganesh Viswanath-Natraj, and Zijie Wang, the research focuses on the transmission of exchange-rate pressures. The study, BIS Working Paper 1383, finds that order flow in offshore NDFs directly influences both offshore forward and domestic spot exchange rates.

Specifically, a US$1 billion increase in offshore demand for the dollar can lead to a depreciation of the domestic spot rate by approximately 10 basis points within minutes. This analysis uses unique transaction-level data on centrally cleared NDFs for ten emerging market currencies, spanning the period from 2014 to 2025, with data processed through LCH ForexClear.

Spreads Widen with Offshore Demand

Beyond the immediate impact on spot rates, the BIS paper shows that the same US$1 billion increase in offshore dollar demand moves the offshore forward rate by about 18 basis points. This offshore trading also contributes to a widening of the spread between offshore and onshore prices.

The authors developed a model to explain these dynamics, identifying two primary forces: offshore demand seeking currency exposure, which moves both prices and the gap between offshore and onshore rates concurrently, and the costs incurred by banks that intermediate between these offshore and onshore markets, which affects this gap relative to prices.

The paper is noted as the first to examine NDF price formation using signed, transaction-level order flow, moving beyond reliance on quoted rates or aggregate trading volumes.

Regulation Shapes Transmission

The study also assesses how capital controls and the capacity of domestic banks to trade offshore influence the transmission of exchange rate pressures. Its findings indicate that the degree to which offshore pressures are felt in domestic markets depends on how strictly banks' cross-market activities are regulated.

The paper illustrates this through four specific episodes where regulators altered banks’ access to offshore NDF markets: in China for the renminbi, in Malaysia for the ringgit, and twice in India for the rupee. For instance, when Indian banks were permitted to participate in offshore markets in 2020, the gap between offshore and onshore prices narrowed. Conversely, when this access was restricted again in 2026, the spread subsequently widened.

Implications for Asia's Central Banks

These findings demonstrate that offshore trading can significantly affect onshore exchange rates, even in economies with capital controls that limit direct access to domestic markets.

For central banks and financial regulators across Asia, the research suggests that effectively managing domestic exchange rate stability requires careful consideration of policies governing the participation of domestic banks in offshore NDF markets.

The extent of regulatory oversight on cross-market activity by banks directly influences the strength of transmission from offshore to onshore.

Decision-makers in Asian economies should evaluate their current regulatory frameworks for NDFs, considering the evidence presented in the BIS Working Paper 1383 published on 16 October 2026, to optimise their approach to exchange rate management.