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Appendix: Recent FX Market Measures in Malaysia
On December 2, 2016, The Financial Markets Committee (FMC, instituted by BNM in mid-2016) announced a package of measures designed to foster the development of the onshore FX markets. The measures include the following:
To enhance further onshore FX risk management, both resident and nonresident institutional investors can dynamically take onshore forward positions on a portfolio basis up to 25 percent of foreign currency or ringgit-denominated assets, without documentary evidence, with a licensed onshore bank or an appointed overseas office. A one-time registration with BNM is required.
Residents can hedge foreign currency exposures and cancel hedging positions for US$/MYR and CNH/MYR currency pairs with a licensed onshore bank without documentary evidence up to an aggregate net open position limit of 6 million ringgits per licensed onshore bank. Participants also must give a one-time declaration of hedging intent.
With effect from December 5, 2016, resident exporters can retain up to 25 percent in foreign currency proceeds from their exports of goods and the balance should be converted into ringgit with a licensed onshore bank. The converted amounts could be deposited in a special facility, earning a higher interest rate of 3.25 percent and available until end-2017. (On December 14, 2017, the BNM announced that the special facility will be discontinued by year-end. Outstanding balances in the facility can continue earning 3.1 percent interest up to March 31, 2018). However, exporters can reconvert their export proceeds to meet projected loans, imports, and other current account obligations for up to six months ahead. Previously, export proceeds were required to be repatriated within six months, but there was no conversion requirement. This measure aims to enhance onshore FX liquidity, while it could potentially increase the transaction costs for exporters.
Prudential limits on foreign currency (FC) investments by residents with domestic ringgit borrowing have been extended to include FC investments onshore and apply to all residents (including previously exempted exporters) with ringgit borrowing for prudential reasons. These measures could limit some of these residents’ FC investments abroad, while those without domestic ringgit borrowing may continue to invest up to any amount.
Prior to the December 2016 announcements, the BNM also enhanced the enforcement of the existing regulations on banks’ non-involvement in offshore ringgit transactions. Onshore banks engaging in ringgit foreign exchange transactions in the onshore market were required to obtain attestation from non-resident banks of non-participation in the non-deliverable forward (NDF) market. The requirement that onshore banks do not participate in or facilitate offshore ringgit derivative trading has been in place since 1998.
In April 2017, the FMC announced a second series of initiatives to develop onshore financial markets, which came into effect on May 2, 2017:
Following feedback from financial market participants, the December 2016 hedging flexibilities were extended whereby registered investors can fully hedge and actively manage their exposures including unwinding of hedging positions—up to 100 percent (from 25 percent) of their underlying assets. In addition, the flexibility to actively manage FX risk exposures up to an aggregate net open position limit of 6 million ringgits per client per bank without documentary evidence was expanded to include GBP, EUR, and JPY (in addition to the US$ and CNH).
Supporting the aspiration to promote a financial market that is trusted, competitive, and resilient, Principles for a Fair and Effective Financial Market were introduced, in a document outlining five universal principles as guidance and serving as an anchor to promote a fair and effective functioning of financial markets. A Code of Conduct for Malaysian Wholesale Financial Markets was also issued. The Code of Conduct sets out the principles and standards to be observed by market participants and the role of industry associations in preserving market order and stability.
To improve liquidity in the conventional secondary government securities (MGS) market and facilitate more effective hedging of interest rate risk, the regulated short-selling framework was liberalized to allow all residents to participate in short-selling activities.
To support future market development, induce greater transparency and facilitate surveillance on the onshore financial market, information reporting and settlement infrastructure was enhanced. The large value payment system, Real-time Electronic Transfer of Funds and Securities System (RENTAS), was enhanced via development of segregated securities accounts up to fund manager level. The system will be able to ease reporting burden on custodians, provide real-time information for surveillance purposes and benefit the market through publication of detailed information.
During a speech delivered at an event sponsored by the Financial Market Association of Malaysia on November 17, the BNM Governor announced the following measures adopted by the FMC to further deepen onshore financial markets1:
Extending the short-selling framework to Malaysian government investment issues (MGII) by both conventional and Islamic banks to increase liquidity and boost trading activities for these Islamic securities in the secondary market as well as tighten the pricing gaps and yield differences between MGS and MGII.
Expanding the eligible collateral for liquidity operations with the BNM to include Bankers Acceptances (BAs) and Negotiable Instruments of Deposits (NIDs) issued by AAA-rated onshore licensed banks. This will enable banks to obtain liquidity under BNM’s Standing Facilities by pledging these money market instruments. The measure is expected to provide an impetus to the trading activities of NIDs and BAs and improve pricing.
Introducing Bank Negara Interbank Bills (BNIBs) in ringgit and foreign currency, made available to onshore banks through auctions to manage ringgit and foreign currency liquidity and interest rate exposures and help provide competitive pricing on FX for all tenors.
I would like to thank Odd Per Brekk, Nada Choueiri, Yinqiu Lu, Hui Miao, and Alla Mirvoda as well as seminar participants at Bank Negara Malaysia for helpful comments. Remaining errors are my own.
This result is explained in the paper by the role that strong macroeconomic fundamentals (that are typically associated with lower spreads) may play in attracting foreign investors.
A comparable movement out of T-bills was observed at end 2016, as the share of nonresident holdings dropped from 78 percent of total in 2016Q3 to 39 percent in 2016Q4.
This may have been an outcome of unwinding of short-term speculative positions held by non-resident investors, an intended effect of the December 2016 measures by BNM (see below).
For the same period, the weights of neighboring Thailand and Indonesia changed only marginally.
Statement by Financial Markets Committee “Initiative to Develop the Onshore Financial Market,” No. 12/16/01, issued on December 2, 2016. Available via: http://www.bnm.gov.my/.
Some of these developments could have also been due to the rebound of capital inflows to emerging markets in early 2017.
Data series used in the paper are provided by the authorities, IMF’s International Financial Statistics Database, and Bloomberg.
Similar to Cochrane–Orcutt procedure commonly used for addressing autocolleration, the Prais–Winsten transformation has a benefit of not wasting an observation, which is valuable for small sample regressions.
The coefficient on budget balance has the right sign but is not statistically significant.
While this still is not a formal test of casualty lagging the independent variable shows that the relationship between capital flows and foreign exchange volatility breaks apart.
Due to high correlation between nonresident activity in the MGS and NDF markets (and potential endogeneity issues between the two), explicitly controlling for this channel in the regression framework is left for future research.