NDF Fixing Sources and Disruption Fallbacks
A non-deliverable forward settles in cash against a published reference rate rather than actual currency, so the contract needs a pre-agreed fixing source and a backup plan for when that source fails.
A non-deliverable forward (NDF) is used to hedge or take a position in a currency that can't be freely delivered or converted — many emerging-market currencies with capital controls, for example. Instead of exchanging the actual currencies at maturity, the two sides settle in cash, usually dollars, based on the difference between the contract's agreed rate and a published fixing rate observed on the settlement date.
Because that fixing rate is central to how much money changes hands, the contract must specify exactly which published source it comes from — often a central bank's official daily rate or a data-vendor poll — and what happens if that source is unavailable, delayed, or itself disrupted (a central bank suspending publication during a crisis, for instance). These disruption fallback provisions typically specify a secondary source, or a survey of reference dealers, to use instead.
An NDF settles on a difference in cash rather than delivering currency, which means the entire trade hinges on a single published fixing rate — and disruption fallbacks exist because that fixing source can, and occasionally does, stop working exactly when it matters most.
Worked example
A fund holds an NDF on the Indian rupee, agreed at 83.00 against the dollar, with a notional of $10 million, referencing the RBI's published reference rate at maturity. If the fixing settles at 84.00, the rupee has weakened, and the fund (long dollars) is owed cash equal to the difference: 10{,}000{,}000 \times \left(\frac{84.00 - 83.00}{84.00}\right) \approx \119{,}048$. If the RBI unexpectedly fails to publish a rate that day — as has happened during market stress — the fallback provision kicks in and the parties settle instead against a poll of reference dealer quotes.