Hedge onshore
Bank Negara to make local ringgit market a more attractive choice
KUALA LUMPUR: Bank Negara will develop the onshore ringgit market to provide more depth to companies and investors engaged in the US dollar-ringgit trade to reduce the influence of the ringgit non-deliverable forward (NDF) market on the local currency.
“We have to look at where we can further expand flexibilities for the onshore market to make the onshore market a more attractive choice and venue for just not residents, but also attract some of the players in the offshore and NDF market, which can include corporates and fund managers,” assistant governor Adnan Zaylani Mohamad Zahid told the media at a briefing yesterday.
“These are some of the areas where we can accommodate demand from non-resident investors for them to hedge in the onshore market. This also looks at further increasing the depth and breadth of the foreign exchange (forex) market and make it more resilient at the same time.”
On Sunday, Bank Negara said there was no change in the Foreign Exchange Administration (FEA) rules and there was no introduction of any new measures.
It said the ringgit remained a non-internationalised currency and any offshore trading of the ringgit such as the ringgit NDF was not recognised.
The central bank said it was taking measures to re-enforce existing rules that have been in place to prohibit the facilitation of the ringgit NDF, and reminded the market to comply with existing FEA rules and Malaysian licensed banks from facilitating any forex transactions that could be related to offshore ringgit NDF market activities.
After resetting the ringgit-dollar trade on Friday, the central bank has requested, through banks in Malaysia, that any non-resident bank that transacts in the forex market must attest that it is not and will not engage in NDF-related transactions.
“It is progressively better enforcement. The market is evolving and we have to look at what else we need to do,” Adnan said.
He said the process of enforcement against the NDF has been a constant vigilance, but said the market reacts to administrative action after a while.
“A couple of months ago, we got the attestation from our onshore banks that they are not facilitating (the NDF market). After a while, we found there was still significant activity during these times (of volatility).“It is difficult for the banks to distinguish whether it is NDF-related or otherwise. We had to come up with another measure, which now is in the form of attestation by the client bank that it is not undertaking NDF transactions.”
The war against the NDF market has been ongoing but reached another level prior to Friday when the central bank noticed onshore rates in the past week were moving in tandem and influenced by the movements in the ringgit NDF market.
With the new attestation requirement, Bank Negara will be enforcing its own forex rules more strictly and watching out for transgressors.
Adnan said Bank Negara could take punitive action against banks in Malaysia for breach of Bank Negara rules if they are found to be engaged in transactions in the NDF market. “We can undertake criminal or administrative action on the banks,” he said.
Although there is no change in the forex rules, many of the NDF players are foreign banks outside the jurisdiction of Bank Negara, which makes it difficult to control.
“When our banks face foreign banks, it is from a client customer relationship. Sometimes, they try to enforce the rules but the foreign banks don’t respond. Basically, they don’t respect our banks.”
Financial Markets Association of Malaysia president Datuk Lee K. Kwan said NDF was an offshore product that is meant to circumvent the forex rules.
“The way Malaysia’s FEA rules are set up is not to facilitate speculation. It is to facilitate real trade and real two-way investments. Malaysia is an open economy and the forex market is not designed for speculation without an underlying (asset).
“For Malaysia, a burst of liquidity can be damaging to the real economy.”
RHB Bank Bhd group treasurer Mohd Rashid Mohamad said banks in Malaysia are fully governed by FEA rules.
“We are to transact with onshore institutions, including foreign banks which have a licence here or foreign counterparts who want to transact on the ringgit.
“Second, we are not to speculate on the dollar-ringgit. Any transaction of the dollar-ringgit needs to be supported by an underlying transaction. On these two broad regulations, the dollar-ringgit transactions should just happen here with a local licensed onshore institution.”