The measures, which take effect on Monday, are to deepen the onshore foreign exchange market. Residents will be allowed to hedge up to a net open position (NOP) of RM6m of US$ and China renminbi exposures per client, per onshore bank, subject to a one-time declaration of non-participation in speculative activity.
NOP exceeding RM6mil can be conducted but under banks’ normal due diligence processes. Institutional investors will be able to hedge their forex exposure up to 25% of invested Ringgit-denominated assets without documentation, subject to a one-off registration with BNM. Investors can still hedge beyond the 25% threshold subject to BNM approval.
“We think these steps will benefit corporates and institutional investors once the process is fully operational,” it said.
As of Monday, 25% of new export proceeds will be allowed to be retained in foreign currency, with onshore banks only. The balance 75% shall be converted into ringgit.
Approval by BNM for foreign currency retentions exceeding 25% will be granted on a case-by-case basis. If exporters require amounts in excess of the retained proceeds, they are allowed to hedge and un-hedge up to a limit of six months of imports and loan obligations.
To compensate for increased conversion costs of resident exporters, export proceeds in ringgit will be eligible for a Special Deposit Facility (SDF) until Dec 31, 2017, yielding a 3.25% per annum rate.
CIMB Research said the measure aims to mobilise export proceeds, 99% of which are estimated to be kept in foreign currency, and could create up to RM69bil per annum of additional ringgit demand (17% of foreign reserves), though actual demand is likely to be lower once loan obligations accounted for.
BNM is offering an avenue for offshore non-resident financial institutions that are appointed by licensed onshore banks and approved by BNM under the Appointed Overseas Office (AOO) framework to undertake 1) buying or selling ringgit forwards based on firm commitment for financial account transactions; 2) opening of ringgit accounts for book-keeping for a non-resident; and 3) provision of ringgit financing to a non-resident for settlement of trade with a resident.
“We believe these measures will help alleviate the downward pressure on the ringgit, minimise attrition of foreign reserves, as well as address concerns that BNM’s clamp down on the offshore non-deliverable forwards (NDF) market hurts the ability of corporates, investors and individuals to manage their foreign currency risks.
“Increased onshore FX liquidity and hedging options will offer an alternative to the offshore NDF market, in which BNM sees “speculative positioning” taking place and has had an
“adverse impact on the domestic foreign exchange”.
“At the same time, BNM is enforcing more control, transparency and accountability in the onshore FX markets through prudential limits, and the registration and approval process,” said CIMB Research.