A non-deliverable forward is a foreign currency financial derivative contract which differs from a normal foreign currency forward contract because there is no physical settlement of the two currencies at maturity. Instead, a net cash settlement will be made by one party to another based on the movement of the two currencies.
NDFs are used in circumstances where there is low liquidity. such as to hedge local currency risks in emerging markets where local currencies are not freely convertible, or when there are restrictions on capital flows. Under these conditions an NDF market could develop in an offshore financial centre and contracts would typicially be settled in major foreign currencies. NDFs are traded over the counter (OTC).
In March 2013 the FT reported on two lawsuits filed against UBS. The lawsuits claimed wrongful dismissal. The two individuals who filed the suits claimed they were fired to cover up any role the bank had in allegedly manipulating the pricing of foreign exchange derivatives. The FT revealed that Singapore had become a significant location for the trade of Asian currency NDFs. Because no physical delivery of currency occurs, counterparties were taking a "fixing rate" set daily by a panel of banks in Singapore. The "shadow" fixing system developed in Singapore alongside the official rates set by southeast Asian central banks.