NDF Meaning: What a Non-Deliverable Forward Is

NDF meaning in plain terms

The key word in NDF is "non-deliverable". A standard forward contract obliges two parties to exchange two currencies at a set rate on a future date. An NDF keeps the price mechanics of a forward but drops the physical exchange. At maturity, the contract is settled by a cash payment of the difference between the agreed forward rate and a reference rate.

The BIS describes NDFs as contracts for the difference between an agreed exchange rate and the spot rate at maturity. The contract is settled with a single US dollar payment, so the holder gets exposure to a currency's performance without funding that currency.

A typical NDF names a currency pair, usually a restricted local currency against US dollars. The confirmation records the notional amount, the forward rate, the fixing source, the valuation date and the settlement date. The master agreement then supplies the default definitions that apply to every trade under it.

How an NDF settles, step by step

The settlement sequence is the part most worth understanding before you read any NDF documentation. The diagram below follows the trade from the agreement to the single net payment, using the same terms as the text above.

1. Trade date: the parties agree the notional amount, the forward rate and the fixing source in the confirmation.
2. Valuation date: the reference rate is observed from the agreed source on the scheduled date set in the confirmation, shortly before settlement.
3. Calculation: the gap between the agreed forward rate and the fixing rate is converted into the US dollar settlement amount.
4. Settlement: one net US dollar payment moves from the party that owes it to the other. The settlement date is set in the confirmation. Where the valuation date is moved because it falls on a non-business day, the FX Committee NDF supplement requires payment no later than two business days after the adjusted valuation date.

NDF vs deliverable forward: how the two compare

The table sets the NDF against a deliverable forward, the standard forward in which the two currencies are physically exchanged at maturity.

• Settlement at maturity
  NDF: Net cash difference, usually paid in USD
  Deliverable forward: Physical exchange of both currencies
• Currency access needed
  NDF: No delivery of the restricted currency
  Deliverable forward: Funding and delivery in both currencies
• Rate reference
  NDF: Fixing source named in the confirmation
  Deliverable forward: Agreed delivery rate for the currency pair
• Where it is used
  NDF: Currencies with restricted onshore or offshore delivery
  Deliverable forward: Freely deliverable currency pairs
• Typical users
  NDF: Hedgers and position takers in restricted currencies
  Deliverable forward: Businesses that need to pay or receive the currency

Neither product is better in general. The choice depends on whether a business needs the currency itself or only the price exposure. For a broker, the more practical question is which structure a liquidity counterparty will quote and document, and that is a contract question as much as a product definition.

Why restricted currencies need NDFs

Authorities restrict some currencies in several ways. They may limit onshore trading by non-residents, or they may prevent delivery of the currency outside the home market. Participants who still want exposure need a route that avoids both limits, and an NDF provides one.

BIS research links NDF demand to hedging and position-taking in currencies that face restrictions on non-resident use. The NDF allows hedging and speculation without providing or requiring funding in the currency itself.

• Onshore limits: the home market may not allow certain counterparties to trade the currency freely.
• Offshore delivery: the currency may not be deliverable outside the home market, so a physical forward cannot settle.
• Policy change: restrictions can ease over time. BIS research on NDFs and currency internationalisation notes that for the renminbi, deliverable forwards have been displacing NDFs offshore.

Worked example of an NDF payment

The arithmetic is simple once the terms are known, but the calculation convention is set by the confirmation. Always read the exact formula in the document you sign, because rounding and fixing conventions can differ between contracts.

The example shows the mechanism, not an expected outcome. Real contracts can differ in the fixing source, the rounding rule and the business-day convention.

What an NDF means for a broker

For a broker, the NDF question is usually about hedging and liquidity sourcing, not about the client-facing product. Whether a broker takes positions, hedges them or passes orders to a counterparty depends on its licence, its provider agreements and its risk policy. The definition alone does not decide any of those points.

Counterparty and routing questions are covered on the liquidity page and in the liquidity provider selection guide. This glossary entry does not describe an NDF product offered by FxTrusts.

Market structure also shapes the answer. A broker that deals against its clients acts as a market maker, while a broker that passes orders on is closer to the model described in the DMA glossary entry. Both models sit inside the wider brokerage revenue model.

Risks and what to check in NDF documentation

Trading currencies, CFDs or leveraged FX positions carry risk of loss. An NDF adds a specific documentation risk, because its value and settlement depend on a reference rate published or calculated by a third party.

• Fixing source: identify which official or market rate applies, who publishes it, and what the contract says if it is not published.
• Fixing disruption: a suspended publication, a sudden devaluation or a change in calculation method can make settlement difficult. Settlement rate options are often set per currency, so check the one named for your currency.
• Valuation date adjustments: check the business-day convention and the payment deadline that follows any adjustment.
• Counterparty credit: confirm the credit terms, collateral and default provisions in the master agreement.
• Governing definitions: confirm which master agreement and definitions apply to each trade.

This page is general information. It does not state which regulator or licence applies to any NDF activity. Those questions are decided by the regulator and by the broker's own legal advisers.