KUALA LUMPUR: The Financial Markets Committee (FMC) has introduced six measures to enhance the liquidity of the onshore foreign exchange (forex) market, to be effective Monday.
The move to deregulate the onshore ringgit hedging market will allow greater flexibility in managing forex risks and reduce the need for exporters and fund managers to hedge in the illegal offshore non-deliverable forwards (NDF) market.
The measures by the FMC, which was set up by Bank Negara Malaysia in May this year, are the first phase of market development initiatives to create a deeper and more transparent onshore ringgit market and a well-functioning onshore forex market.
The six measures are:
- Allowing residents to hedge and actively manage their foreign exposure with onshore banks, inclusive of cancellation and unwinding, subject to prudential limits;
- Allowing resident and non-resident fund managers to freely and actively manage forex exposure of up to 25 per cent of invested assets;
- Enhancing non-residents’ accessibility to the onshore financial market through Appointed Overseas Office;
- Streamlining policy on investment in foreign currency assets onshore and offshore up to the applicable prudential limit;
- Rebalancing demand of foreign currency in the forex market; and,
- Enhancing secondary bond market liquidity via commitments of market makers.
FMC chair Adnan Zaylani Mohamad Zahid, who is also Bank Negara’s assistant governor, said the measures would allow greater hedging flexibility that could lead to effective risk management and continuous liquidity of foreign currencies in the onshore market.
He said the new move was not a form of capital controls but new liberalisation and deregulation measures to enhance the ringgit’s standing against other currencies.
“I must stress that this is not a form of capital controls but merely measures as investors and corporates are still free to manage their exposure to the forex,” said Adnan at a media briefing, here, yesterday.
“With these in place, we expect to reduce portfolio flows volatility and eventually rebalance the demand for the ringgit.”
Bank Negara recently asked Malaysian banks to send form letters to their offshore counterparts, seeking their commitment to cease trading the ringgit in the NDF markets.
The letters also warned of “prompt supervisory intervention” against violators.
“We have already had seven banks that said they would exit the NDF market. They have discussed with us on how to manage any impact on their investment portfolios.
“We are providing liquidity to the onshore market and will continue to do so as far as necessary. We do need to maintain liquidity in our markets,” he said.
Adnan said the new measures would help hedge the ringgit against other currencies and, thus, provide a better balance in Malaysia’s forex market.
“As a largely trade-dependent economy, we rely quite heavily on imports and exports. In the past, most of these exporting firms would retain 100 per cent of their export proceeds in foreign currency for payment of imports and loans, which had spurred forex imbalance against the ringgit.
“Under the rebalancing and refinement initiatives, exporters can retain up to 25 per cent of export proceeds for payment of imports and loans. The other 75 per cent must be converted into ringgit.”
Exporters will have six month to do the conversion.
There will also be a special deposit facility for ringgit proceeds being offered to exporters via all commercial banks at a return rate of 3.25 per cent per year.
“We are also streamlining treatment for investments in foreign currency assets as residents with domestic ringgit borrowings are now free to invest in foreign currency assets onshore and abroad up to the prudential limit of RM50 million,” Adnan said.
“Residents without domestic ringgit borrowings will continue to enjoy flexibility of investing in foreign currency assets onshore and abroad up to any amount.”
Adnan said the FMC would assess the effectiveness of the measures in December next year and it was hopeful of seeing the intended results within the medium term by end-2018.
Emerging economies including Malaysia have seen an increase in capital outflows as foreign investors sell local stocks and bonds amid expectations of an interest rate hike by the United States Federal Reserve at its meeting on December 13.