Prepared by Roberto Piazza (IMF) in the context of the 2013 Malaysia FSAP (http://www.imf.org/external/pubs/ft/scr/2013/cr1352.pdf).
A number of central banks in Emerging Markets in other parts of the world also adopted a symmetric approach, accumulating reserves when current and capital inflows were strong, and running them down in the face of outflows, thus reducing exchange rate volatility.
Excess liquidity is here defined as holdings of BNM paper, plus excess reserves and other amounts due by the BNM to financial institutions.
Short-term money market (STMM) deposits are fixed-term deposits with maturity from overnight to one year. If redeemed before maturity, interest is not paid. These deposits are mainly used by large corporations as a form of short-term investment of their excess liquidity. STMM deposits roughly coincide with the entry “Other deposits” in the BNM Statistical publications.
Excluding deposits held by BNM.
This is commonly the case in markets where banks hold a long-term structural surplus of reserve balances.
The BNM does not utilize Government Investment Issues (GII), which are Shariah-compliant securities issued by the Government of Malaysia.
RAM (Rating Agency Malaysia) and MARC (Malaysia Rating Corp) are rating agencies based in Malaysia.
EMEAP-member securities are accepted as long as they are denominated in USD, GBP, EUR, JPY or the respective domestic currency. US Treasuries and UK Gilts are also accepted.
Rules for collateral eligibility and margins applied have been updated in May 2012 and can be found at https://fast.bnm.gov.my/fastweb/public/files/GUIDELINES%20ON%20STANDING%20FACILITIES%20MAY%202012.pdf
As specified by the Central Bank of Malaysia Act 2009, paragraph 32.
See the Technical Note on Crisis Preparedness and Crisis Management Framework.
Remaining controls do prevent speculative use of derivatives by investors without an underlying cash position.
See Pilot External Sector Report—Individual Economy Assessments, IMF SM/12/167.
The volatility of the nominal effective exchange rate (NEER) has been even smaller. Over the period 01/2005-04/2012, the monthly correlation between NEER (calculated by the BIS) and the RM/USD exchange rate was 83 percent. Over the same period, however, the coefficient of variation of the RM/USD exchange rate was 7.5 percent, while the corresponding value for the NEER was just 2.9 percent.
Foreign reserves grew substantially between December 2007 and June 2008. This is why the real extent of the reduction in foreign reserves cannot be fully appreciated from Table 2, which only reports end of year values.
These swaps make up most of the category called “deposits with financial institutions” by the BNM.
i.e., compared with liquidity-injecting OMO or SF, which require banks to provide collateral.
BNM press statements on October 14, 16, 30 and on November 5, 2008.
For various technical reasons, this small change facilitates liquidity management by banks, and short-term liquidity forecasting by the central bank.