NDFs: What Retail Usually Cannot Trade

Deliverable vs non-deliverable. Know the box.

Advanced 5 min read Course 45 of 60

Course 45 of 60 in the forex hub. A non-deliverable forward settles in cash, and the desks that actually use one are at banks and companies. I'd walk past a retail platform offering a restricted currency at high leverage.

When the currency can't leave home

On the pairs most people trade, the two currencies can actually be exchanged. Retail spot in the majors works that way: you trade over the counter with a dealer on the other side, and the money could change hands if it came to that. A non-deliverable forward is different. It settles in cash, usually dollars, and the local currency never moves. The loss that makes headlines is someone chasing a restricted currency through an offshore platform that only borrowed the name.

NDFs are mostly traded by bank desks. A retail login usually means a different product under the same label, so know which one you're looking at before you put money in. A listed currency future is another way to get exposure, and that route is in the futures course.

What non-deliverable means

The trade ends with a cash payment worked out from a published fixing rate, because the currency can't freely leave its home country. Delivering the local notes was never part of the deal. That restriction is the whole reason the product exists, and once you know it, a lot of exotic-currency marketing gets easier to read.

For most retail accounts the right size in these is zero. Your dealer probably doesn't offer the real contract, and the tools on this site are built for positions you can actually exchange.

Non-deliverable: you cannot get the currency. You settle a difference Deliverable G10 You can exchange the notesRetail FX usually thisStill OTC NDF Fixing + cash settleConvertibility wallMostly for a firm desk

Why these forwards exist

A company that's owed money in a restricted currency still needs protection against the rate moving. It can't simply move the money out, so it settles the difference in cash against a fixing, paid in a major currency. That's how banks and companies handle it. The line below puts a U.S. retail deposit rule next to it so you can see how far apart the two worlds are.

An NDF settles in a major currency, usually dollars, for currencies with convertibility or offshore limits. On $100,000 notional the retail floor is 0.02 times 100,000 = $2,000 on a major, and 0.05 times 100,000 = $5,000 on any other pair. A 100:1 banner is 100,000 divided by 100, or $1,000, short of both floors.

The platform in the diagram advertises USDINR at 100:1. The NFA decides which currencies count as majors and reviews that list at least once a year, but here it doesn't matter: a $1,000 deposit is under the $2,000 floor for majors and the $5,000 floor for everything else. A U.S. dealer whose customer is short on deposit has to collect more or close the position. Look the firm up on NFA BASIC before you assume an offer is supervised, and if you want to price a stop, do it on a deliverable pair in the stop calculator.

NDFs exist because the cash market is restricted Controls you cannot freely deliverthe pair still needs a hedge Fixing a published ratesettlement vs that You usually cannot trade themretail default: skip

Who actually uses them

Banks, funds and companies with a trading desk use NDFs, because they already have the exposure and need to hedge it. If that's you, the counterparty didn't find you through an ad, and you already know more about this than a short lesson can tell you.

For everyone else it's background knowledge. It explains some odd quotes you'll run into, and it explains why a retail offer in one of these currencies deserves suspicion.

What a retail offer usually is

Ask what's behind the button. Is it a forward with a fixing you can look up, or a contract where the dealer sets the price and takes the other side? The currency code is doing most of the selling. It may be a perfectly ordinary dealer product, and it's still a poor stand-in for the real market in that currency.

If you can't find the fixing source, the settlement currency and the firm's registration in the documents, I'd stop there. A legitimate product makes all of that easy to find.

If a banner offers 'USDINR' at 100:1, ask whether it is even a real NDF Retail reality Many 'exotic' tickets are just a dealer CFD.That is a counterparty product, not an IMM NDF.Stay in deliverable G10 unless you have a real reason and a real desk.

Stick with currencies you can exchange

My default book is deliverable majors, unless there's a real commercial reason and a real desk behind the trade. A listed currency future is something a retail account can open, and the lesson on listed FX futures covers that choice.

Do you have a commercial reason to be in an NDF? Commercial / desk reason? If you already trade for a firm treat this as a sketch Stay in G10 majors are enough

Offers I'd walk past

Where people get hurt is chasing a restricted currency on an offshore site, sized off the banner's leverage instead of the U.S. deposit floor. On a product you can't properly reach, the right amount to risk is zero. If you have an actual business exposure in one of these currencies, that's a hedging problem, and the lesson on hedging exposure is where to start.

Two prices for one currency

Most retail traders can't get the real contract, and they don't have the exposure a bank is hedging. The name is still worth knowing, because it helps explain why some emerging-market currencies seem to have more than one price.

When money can't move freely in and out of a country, the rate available inside it and the rate quoted outside it don't have to match. I won't put a number on that difference, because it changes and I'd only be guessing. It describes the market, and it's a poor reason to go hunting for a ticket. Currencies you can actually exchange are the sensible retail book.

Keeping it straight

  • An NDF settles in cash against a published fixing, and the local currency stays home.
  • Banks, funds and companies with a desk are the real users.
  • A retail offer in a restricted currency is often the dealer's own price under that name.
  • Stick with deliverable majors unless you have a commercial reason and the desk to go with it.

If you can't find the fixing or the desk, stay with currencies you can exchange. Educational only. Not a recommendation to buy, sell, or hold any contract or pair.