PETALING JAYA: In a move that Bank Negara sees as a trading mechanism reflecting the actual supply and demand for the ringgit, a new fixing methodology will come into effect starting July 18.
The new methodology for the US dollar/ringgit spot fixing that the central bank worked out in collaboration with the Financial Markets Association of Malaysia (FMA) is based on market transaction data rather than submission of quotations by selected banks.
“The ringgit will be computed based on the weighted average volume of the interbank US dollar/ringgit forex spot rate transacted by domestic financial institutions between 8am and 3pm. It will be published at 3.30pm daily,” the central bank said in a statement yesterday.
This means that the current system, where the exchange rate between the ringgit and the US dollar is fixed based on quotations by selected domestic banks, will be discontinued. Also, under the present system, the exchange rate is determined at about 11am.
When the banks put in their quotes under the present system, some also take into account the trading of the ringgit against the US dollar in the offshore market, or better known as the non-deliverable forward (NDF) market.
The NDF market is settled in US dollars but traded offshore.
Currency analysts said that under the new system, the ringgit would not be influenced by the movements in the NDF market.
“This is because it is based on the volume traded between the banks. It is based on the actual supply and demand of the currency,” said the analyst.
The analyst said that the NDF market gives the view on the sentiments on the forward movements of the ringgit.
“Eventually, there could be a spread between the rates on the NDF and the domestic market,” he said.
Bank Negara said that the new methodology was more transparent and better reflected daily trades.
“The market transaction data is sourced from online reporting by domestic financial institutions to Bank Negara.
“The new methodology is more transparent and better reflects underlying trades during the day,” it said.
The central bank also said that the official closing hour for the onshore ringgit market will also be extended by an hour to 6pm effective on the same date.
Bank Negara said this would give businesses additional time to complete their foreign-exchange transactions.
“Nevertheless, the onshore market participants can continue to transact after the official closing hour,” it said.
The Kuala Lumpur USD/MYR Reference Rate will be published under a parallel trial on the Reuters page KLMYRREF starting from June 20, although it will be effective only from July 18. Bank Negara said this parallel period allowed for the market transition process.
On the effective date, the reference rate will assume the current PPKM-RM page on MYRFIX02 and continue thereafter.
Bank Negara and FMA said that they expected a smooth migration without any disruptions.
Bank Negara director of investment operations and financial market Adnan Zaylani said these enhancements in the Malaysian financial market infrastructure followed from the ongoing collaboration with the FMA, and were among the first few initiatives discussed at the Financial Market Committee, an inclusive forum for all financial market stakeholders to further develop and improve the Malaysian financial markets.
FMA president Lee K Kwan said the reference rate, which is based on market transaction data rather than the submission of quotations by selected banks in the previous methodology, represents comprehensively all interbank forex transactions conducted during the trading period.
“This initiative elevates the US dollar/ringgit FX benchmark rate setting process to global best practices, ensuring that the FX spot reference rate is well received domestically and internationally, contributing to the further development of the Malaysian financial markets,” he added.