# Non-Deliverable Swaps (NDS): Definition, Key Features, and Examples

## What Is a Non-Deliverable Swap (NDS)?

A non-deliverable swap (NDS) is a variation on a [currency swap](https://www.investopedia.com/terms/c/currencyswap.asp) between major and minor currencies that are restricted or not convertible. This means there is no physical delivery of the two currencies involved, unlike a typical currency swap where there is an exchange of currency flows. This type of swap is commonly used to mitigate risk in countries with restricted currencies or currency controls.

Periodic settlement of an NDS is done on a cash basis, generally in U.S. dollars. The settlement value is based on the difference between the exchange rate specified in the swap contract and the spot rate, with one party paying the other the difference.

### Key Takeaways

*   Non-deliverable swaps (NDS) involve cash settlement in U.S. dollars without physical currency exchange.  
    
*   NDS are used to hedge risks related to restricted, illiquid, or volatile currencies.  
    
*   Key variables in NDS include notional amounts, currencies, settlement dates, and contract rates.  
    
*   Multi-national corporations use NDS to mitigate risks from currency controls and depreciation.  
    
*   Due to their complexity, NDS contracts are best managed by experienced investors or institutions.

## How Non-Deliverable Swaps (NDSs) Function and Their Importance

Multinational companies use non-deliverable swaps to manage the risk of not repatriating profits due to currency controls. They also use NDSs to [hedge](https://www.investopedia.com/terms/h/hedge.asp) the risk of abrupt devaluation or [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) in a restricted currency with little [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), and to avoid the prohibitive cost of exchanging currencies in the local market. In countries with exchange limits, financial institutions use NDSs to protect their foreign loan exposures.

The key variables in a NDS are:

*   the notional amounts (that is, the amounts of the transaction)
*   the two currencies involved (the non-deliverable currency and the settlement currency)
*   the settlement dates
*   the contract rates for the swap, and
*   the fixing rates and dates—the specific dates on which the spot rates will be sourced from reputable and independent market sources.

> **Fast Fact**
>
> Think of a non-deliverable swap as multiple non-deliverable forwards packaged together.

## Practical Example: How a Non-Deliverable Swap (NDS) Works

Consider a financial institution—let’s call it LendEx—based in Argentina, that has taken a five-year US$10 million loan from a U.S. [lender](https://www.investopedia.com/terms/l/lender.asp) at a fixed interest rate of 4% per annum payable semi-annually. LendEx has converted the U.S. dollar into Argentine pesos at the current exchange rate of 5.4, for lending to local businesses. However, it is concerned about the future depreciation of the peso, which will make it more expensive to make the interest payments and principal repayment in U.S. dollars. It therefore enters into a currency swap with an overseas [counterparty](https://www.investopedia.com/terms/c/counterparty.asp) on the following terms:

*   **Notional Amounts (N):** US$400,000 for interest payments and US$10 million for the principal repayment.
*   **Currencies:** Argentine peso and U.S. dollar.
*   **Settlement Dates:** 10 in all, the first one coinciding with the first interest payment and the tenth and final one coinciding with the final interest payment plus principal repayment.
*   **Contract Rates for the Swap (F):** For the sake of simplicity, say a contract rate of 6 (pesos per dollar) for the interest payments and 7 for the principal repayment.
*   **Fixing Rates and Dates (S):** Two days before the settlement date, sourced at 12 noon ET from Reuters.

The methodology for determining the NDS follows the following equation:

> Profit = (NS – NF) ÷ S = N (1 – F ÷S)

Here’s how the NDS works out in this example. On the first fixing date, which is two days before the first interest payment/settlement date, assume the spot exchange rate is 5.7 pesos to the U.S. dollar. Since LendEx contracts to buy dollars at a rate of 6, it would have to pay the difference between this contract rate and the spot rate times the notional interest amount to the counterparty. This net settlement amount would be in U.S. dollars and works out to -$20,000. This is calculated as:

> (5.7 - 6.0) x 400,000 = -120,000 ÷ 6 = -$20,000

On the second fixing date, assume the spot exchange rate is 6.5 to the U.S. dollar. In this case, because the spot exchange rate is worse than the contracted rate, LendEx will receive a net payment of $33,333. This is calculated as:

> (6.5 – 6.0) x 400,000 = 200,000 ÷ 6 = $33,333

This process continues until the final repayment date. A key point to note here is that because this is a non-deliverable swap, settlements between the counterparties are made in U.S. dollars, and not in Argentine pesos.

## What Is a Swap?

A swap is a financial contract involving two parties who exchange the cash flows or liabilities from two different financial instruments. Most contracts like this involve cash flows based on a notional principal amount related to a loan or bond. One thing to keep in mind is that the security can be almost anything. The principal typically doesn't exchange hands.

## Who Uses Swaps?

Swaps are commonly traded by more experienced investors—notably, institutional investors. These investors include banks, financial institutions, and governments. They are commonly used to manage different types of risks like currency, interest rate, and price risk.

## Are Swaps Regulated?

Yes, the swap market is regulated. This market is overseen by the [Commodity Futures Trading Commission (CFTC)](https://www.investopedia.com/terms/c/cftc.asp). It was given the authority to regulate the swap market under the  [Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp).

## Final Thoughts on Non-Deliverable Swaps (NDSs)

Non-deliverable swaps are currency swaps where the underlying currencies cannot be converted directly. There is no physical exchange of the underlying currencies, and settlement takes place on a cash basis, usually in U.S. dollars.

This type of swap is commonly used by large banks and corporations to manage the risk of investing in emerging or highly regulated markets. In addition to the currencies involved, an NDS contract will state the notional amounts, contract amounts, and settlement dates. Due to their complexity, NDSs are generally not recommended for novice investors.

> **Article Sources**
>
> 1.  Silicon Valley Bank. “[Non-Deliverable Forward/Swap Contract (NDF/NDS)](https://www.svb.com/globalassets/uk-site/cl155_ndf_fx-product-sheets.pdf).” Pages 2-3.
>     
> 2.  Commodity Futures Trading Commission. "[Dodd-Frank Act](https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm)."