PETALING JAYA: Bank Negara will make it easier for local companies and individuals to hedge their US dollar and Chinese yuan requirements at home.
In its fight to fend off speculative attacks on the ringgit from traders taking positions in offshore markets, the central bank announced a pilot programme for the US dollar-ringgit and yuan-ringgit that allows companies to hedged their positions with minimal questions asked on the reasons for undertaking such transactions
The central bank also said the operational process for local companies to enter into hedging positions with local banks would be simplified.
Bank Negara governor Datuk Muhammad Ibrahim, in announcing three new measures, said that the overall objective was to allow local companies access to hedging facilities freely and directly with financial institutions incorporated here.
The first measure was to allow local companies to undertake hedging transaction for US dollar and yuan against ringgit without the need for sighting of the underlying documents.
“Subject to a position limit, only a declaration by the customers will be sufficient. Accordingly, cancellation of the hedging will also be freely allowed,” he said.
Previously companies tend to shy away from undertaking a hedge in the local markets, citing the need to comply with “tedious paper work”. This resulted in companies keeping their export proceeds for up to three months offshore – the maximum period allowed under the regulations – before converting them back to ringgit to bring the money onshore.
Some companies tend to use the period to go into a hedge in the offshore markets that is settled in US dollar.
The governor said that to further deepen the local hedging market, Bank Negara was working with the Securities Commission and Bursa Malaysia to introduce a US dollar and yuan-ringgit futures onshore exchange.
“Similar to the inter-bank market, these will, for now, be subject to position limits, and for now only applicable to residents. We shall review this policy from time to time, with a view to further liberalise the rules,” said Muhammad during his opening remarks at the Financial Markets Association annual dinner last Friday.
The third measure was to have a common understanding and consistent interpretation for what is required under the Foreign Exchange Administration (FEA) rules
“This will be an industry standard that sets the minimum due diligence and list of documents required for FEA,” said the governor.
Towards this end, the Financial Markets Committee (FMC) is in the final stages of rolling out the framework for easier understanding of what is required under the FEA.
“It is expected, through this important initiative that there would be better clarity and greater efficiency for the financial institutions and their customers in undertaking foreign exchange (FX) and hedging transactions,” said Muhammad .
The FMC comprises representatives from the financial institutions, Bank Negara, corporations and financial services provider and is responsible to come up with strategies to help the smooth running of the wholesale financial markets.
In recent weeks, the ringgit has come under attack from speculators taking advantage of the huge gap in the US dollar-ringgit exchange rate in the onshore and offshore markets.
The offshore market is also known as the ringgit non-deliverable foreign exchange (NDF) market and it is settled in US dollars.
The central bank noted that Malaysia’s onshore hedging facilities attracted little interest and was a small portion compared to the total foreign exchange transactions undertaken by the country.
In 2015, FX market transactions volume reached a staggering US$2.52 trillion, yet currency derivatives such as foreign exchange forwards and options only made up 5% and 1% of the total volume respectively.
The governor said this prompted several questions and among them was whether investors were able to hedge effectively or efficiently manage the exposures of their portfolios.
Muhammad told financial institutions that there were opportunities in deepening the hedging market for reasons beyond the requirements for trade or the real economy.
Towards this end, he drew attention to foreigners holding 33.7% of the government bonds.
“Where are they hedging their foreign exchange exposures? What product can the industry offer for them to hedge onshore? Given these obvious opportunities, we need to develop solutions that will benefit the industry as a whole,” he said.