In forex trading, a restricted market is one that does not allow for a freely floating exchange rate for a specific currency. Most currencies trade worldwide and fluctuate in relative value based on supply, demand, and other market factors. However, some money has oppressive government control with exchange rates that do not reflect economic variables. Instead, these currencies have artificial pricing at levels that vary widely from how they would trade if exchanged on free markets.
Instead, the gain or loss on such an arrangement is settled in another freely trading currency. Restricted markets can take many forms depending on the level of control a country’s government may take in managing its currency. Some currencies are entirely blocked and non-convertible into other currencies. Other nations will ban the export of their currency, enact laws that make the domestic use of other currencies illegal, and forbid citizens from holding assets in the currencies of other nations.
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Private sector companies, nonprofit organizations and government bodies all transact with various forms of restricted assets. For a company, a restricted asset can take the form of collateral for a loan. Restricted cash and investments held by securities firms and trading and clearing exchanges for regulatory purposes are common in the finance sector. Like futures contracts, NDF contracts allow two parties to agree to exchange a thinly traded, or non-convertible currency, at terms that include a specific fixing and settlement date. However, unlike standard futures contracts, NDFs do not require delivery because restricted currencies may not be deliverable.
- In forex trading, a restricted market is one that does not allow for a freely floating exchange rate for a specific currency.
- Examples of such volatility can be found in countries that have experienced periods of hyperinflation resulting from government monetary or fiscal policies.
- These Article 14 countries are generally poorer nations with weaker economies.
- A port authority of a city, for example, holds restricted assets in the form of lessee deposits.
A restricted asset is cash or another item of monetary value that is set aside to use for a particular stated purpose, primarily to satisfy regulatory or contractual requirements. They are segregated from other assets to mark clear delineations of their use. Because the currency may be controlled and is undeliverable, any difference in value has the settlement in U.S. dollars or another non-controlled currency. These NDF contracts are often traded outside a restricted market because they may be illegal within those markets. Restricting trade of a currency can prevent potential economic volatility and disruption in cases when many citizens decide to move assets outside the country. Examples of such volatility can be found in countries that have experienced periods of hyperinflation resulting from government monetary or fiscal policies.
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These black markets have currency exchange rates which differ widely from the government-mandated levels. Non-convertible currencies are often those in nations lacking economic stability. At various times such currencies as the North Korean won, the Angolan kwanza, and the Chilean peso have been blocked. Such controls are less frequent than they were several decades ago, as more nations become willing to allow flexibility and freedom in foreign trade. Other governmental controls are less strict, allowing the trading of their currency, but pegging it to another country’s currency. However, even with controls in place, it is possible to open a position in a restricted currency using a non-deliverable forward (NDF) options contract.
In the nonprofit world, restricted assets are funds that must be used for purposes specified by donors. Restricted assets would fund an endowed chair or department at a university. A donation to a homeless shelter for bathroom renovations would have to be segregated and accounted for separately from the general budget of that nonprofit organization. For the most part, however, donations to nonprofit groups are unrestricted, which means they are free to spend the funds as they see fit. A port authority of a city, for example, holds restricted assets in the form of lessee deposits. Another example of a restricted asset in a municipality is the proceeds from a revenue bond.
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Other restrictions include the allowable amount of money exported and requirements that allow trading only on government-approved exchanges. Examples of currencies where conversions may happen, but which are subject to restrictions or pegging to other currencies, including the Nepalese rupee, the Libyan dinar, and the Jordanian dinar. In many cases, black markets emerge when a currency is restricted.
How a Restricted Asset Works
Although the International Monetary Fund (IMF) encourages global monetary cooperation and exchange rate stability, its Article 14 allows exchange controls for transitional economies. These Article 14 countries are generally poorer nations with weaker economies. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘restrict.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Add restriction to one of your lists below, or create a new one. Circumscribe stresses a restriction on all sides and by clearly defined boundaries.
