Generally, the State Bank of Pakistan (SBP) permits a limited number of derivative transactions/products such as swaps and options with certain reporting and disclosure obligations and these products are understood to be used only for hedging purposes. According to Regulation 9 of the Financial Derivatives Business Regulations, the following three derivatives transactions are allowed:
1. Foreign Currency Options.
2. Forward Rate Agreements.
3. Interest Rate Swaps.
Although there is no specific reference to currency swaps in Regulation 9, it provides that any other types of derivative transactions including currency swaps can be executed with the prior approval of SBP. In the same vein, Section 18(b) of the State Bank of Pakistan Act, 1956, provides that SBP may operate in financial markets by “swap or lending operations in foreign currencies” and also has the power, under section 23(1), to directly or indirectly hold, purchase or sell financial and capital instruments including derivatives.