Non-Deliverable Swaps (NDS) in Australia: 2025 Guide

As global trade intensifies and currency markets remain unpredictable, Australian businesses and investors are turning to sophisticated financial tools to manage risk. One standout in 2025 is the Non-Deliverable Swap (NDS), a derivative that’s gaining traction among CFOs, treasury teams, and savvy investors alike. But what exactly is an NDS, and why is it suddenly in the financial spotlight?

What is a Non-Deliverable Swap (NDS)?

A Non-Deliverable Swap (NDS) is a type of over-the-counter (OTC) derivative contract that allows two parties to swap cash flows based on the movement of a reference exchange rate, but with no physical delivery of the underlying currency. Instead, the difference between the contracted rate and the prevailing market rate at settlement is paid in a convertible currency—usually USD or AUD.

• No physical currency exchange: All settlements are made in a widely traded currency, sidestepping currency controls or illiquid markets.

• Customisable terms: NDS contracts can be tailored in terms of notional amount, tenor, and settlement frequency.

• Primary use: Hedging exposure to non-convertible or restricted currencies (like the Chinese yuan or Indian rupee) or to manage risk in volatile currency pairs.

For example, an Australian company with receivables in Indian rupees (INR) but unable to physically receive INR due to currency restrictions might use an NDS to hedge against AUD/INR fluctuations, settling the gain or loss in AUD.

Why NDS is Gaining Momentum in 2025

Several factors have propelled the popularity of NDS in Australia this year:

• Global market volatility: With ongoing geopolitical tensions and divergent central bank policies, currency swings have become more unpredictable, making robust hedging essential for exporters and importers.

• Regulatory clarity: The Australian Securities and Investments Commission (ASIC) introduced updated guidelines in late 2024 clarifying the treatment of OTC derivatives, making NDS contracts more accessible and transparent for institutional users.

• Asian trade growth: Australia’s growing trade relationships with India, China, and Southeast Asia—where currency controls are common—mean more corporates need flexible, compliant hedging tools.

• Technology and liquidity: Digital trading platforms and the entry of major banks and fintechs have made NDS pricing more competitive and contracts easier to execute.

According to the Reserve Bank of Australia, NDS volumes have increased by nearly 20% year-on-year, with the AUD/INR and AUD/CNY pairs showing the most significant growth.

How Australian Businesses Use NDS: Real-World Examples

NDS are no longer just the domain of global investment banks. Here’s how they’re being used on the ground in 2025:

• Exporters: An Australian mining company exporting iron ore to India uses NDS to lock in the AUD value of future INR payments, shielding profits from rupee depreciation.

• Importers: A retail chain importing electronics from China uses NDS to manage costs, as the Chinese yuan remains subject to capital controls and can be volatile during policy shifts.

• Investors: Australian fund managers investing in emerging Asian markets use NDS to neutralise currency risk, ensuring portfolio returns aren’t eroded by adverse exchange rate movements.

In each scenario, NDS contracts are crafted to match the timing and amount of expected foreign currency flows, with settlements made in AUD—eliminating the need to physically move funds across borders.

Key Considerations and 2025 Policy Updates

While NDS offer clear benefits, they come with unique considerations in 2025:

• Counterparty risk: Since NDS are OTC contracts, the risk that the other party defaults is ever-present. ASIC’s new guidelines require clearer collateral and margin arrangements for NDS trades.

• Tax treatment: The Australian Taxation Office (ATO) updated its guidance in March 2025, clarifying that NDS gains or losses are treated as ordinary income or deductions for tax purposes—important for year-end planning.

• Regulatory reporting: All NDS trades must be reported to ASIC’s trade repository, part of Australia’s G20 commitments on derivatives transparency.

With these safeguards, NDS are now a mainstream risk management solution for a wide range of Australian corporates and investors.

Conclusion

Non-Deliverable Swaps are more than a niche financial instrument—they’re a vital shield against currency risk for Australian businesses and investors operating in a globalised, often turbulent, economy. With new regulatory clarity and growing demand for Asian market exposure, understanding and leveraging NDS could be the difference between profit and peril in 2025.