Non-Deliverable Swap (NDS)

What is an NDS?

A non-deliverable swap (NDS) is a currency swap used when one of the currencies is restricted, illiquid, or not freely convertible. Unlike a conventional currency swap, there is no physical exchange of the restricted currency. Instead, counterparties settle the net difference in a freely convertible currency (commonly U.S. dollars) based on a pre-agreed contract rate and the prevailing spot rate on specified fixing dates.

Why use an NDS?

• Hedge currency exposure in markets with capital controls or limited liquidity.
• Protect against abrupt devaluation or depreciation of a restricted currency.
• Avoid the high cost or impossibility of exchanging local currency in the domestic market.
• Manage foreign currency loan exposures in countries with exchange limits.

Key characteristics

• Settlement: Cash-only, typically in U.S. dollars.
• Contract components:
• Notional amount(s)
• Two currencies (the non-deliverable currency and the settlement currency)
• Settlement dates
• Contract (forward) rates
• Fixing rates and fixing dates (sources are independent market providers)
• Structure: Can be viewed as a series of non-deliverable forwards bundled together.

How settlement is calculated

Settlement amounts are computed using the contract rate (F), the observed spot/fixing rate (S) on the fixing date, and the notional amount (N). The sign of the result determines which counterparty pays.

Common formula (when rates are quoted as local-currency per USD and N is expressed in USD):
Settlement (USD) = N × (S − F) ÷ F

A positive result means the counterparty that contracted to receive the local currency pays the other party; a negative result means the opposite.

Practical example

Scenario
* Borrower (LendEx) in Argentina has a five-year US$10 million loan and wants to hedge peso depreciation risk on periodic interest and the principal.
* They enter an NDS with an overseas counterparty for periodic settlements in USD.

Example terms (simplified)
* Notional for interest payments: N = US$400,000
* Contract rate (F): 6.0 pesos per USD (for interest leg)
* Fixing dates: Two business days before each settlement
* Spot rate on a fixing date: S

Example calculations
1. If S = 5.7 pesos/USD:
Settlement = 400,000 × (5.7 − 6.0) ÷ 6.0 = 400,000 × (−0.3) ÷ 6.0 = −$20,000
LendEx pays $20,000 (because the contract rate is better than spot).
2. If S = 6.5 pesos/USD:
Settlement = 400,000 × (6.5 − 6.0) ÷ 6.0 = 400,000 × 0.5 ÷ 6.0 = $33,333
LendEx receives $33,333 (because the spot is worse than the contracted rate).

These payments repeat on each settlement date until maturity; the principal repayment can be handled as a final settlement.

How an NDS differs from other swaps

• Swap: a broad class of contracts exchanging cash flows (interest, currency, etc.). Notional principal typically does not change hands.
• NDS: specifically addresses currency swaps where the restricted currency cannot be delivered; settlements are net cash in a convertible currency.
• Non-deliverable forward (NDF): like a single-period NDS; an NDS can be thought of as multiple NDFs rolled together.

Who uses NDSs?

Institutional users: multinational corporations, banks, financial institutions, and governments—especially those with exposures in emerging or heavily regulated markets. NDSs are tools for experienced market participants to manage currency and repatriation risks.

Regulation

Swap markets are subject to oversight in many jurisdictions. For example, in the United States, swaps are regulated under statutes such as the Dodd‑Frank Act and overseen by authorities like the Commodity Futures Trading Commission (CFTC).

Final thoughts

Non-deliverable swaps provide a practical hedge where currency convertibility is limited. They enable counterparties to economically transfer currency risk without exchanging the restricted currency. Because of the contractual complexity and model dependence (fixings, notional conventions, settlement mechanics), NDSs are best managed by experienced institutions or investors with appropriate expertise.