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"Onshore Foreign Exchange Hedging for Non-Resident Investors" Workshop

Ref No : 02/17/08 27 Feb 2017 Embargo : For immediate release    

On 24 February 2017, Bank Negara Malaysia featured in a workshop on “Onshore Foreign Exchange Hedging for Non-Resident Investors”. The workshop was organised in collaboration with Asia Securities Industry and Financial Market Association (ASIFMA) and Global Financial Markets Association (GFMA) and hosted by CIMB Bank. About 60 participants comprising global custodian banks, global fund managers, index providers and institutional investors from Hong Kong, Singapore, Thailand and Malaysia connected via video conference to discuss issues and queries on the financial market development measures that were announced by the Financial Markets Committee on 2 December 2016. The discussion focussed on onshore hedging, liquidity in the foreign exchange market and operational arrangement for investments by fund managers.

In the workshop, Bank Negara Malaysia (the Bank) provided a perspective of the onshore foreign exchange (FX) market liquidity, where over the past four years, the overall FX turnover averaged around USD2.5 trillion. The daily market volume is a measure that would indicate the ability of participants to transact in the FX market. The average daily trading volume is USD 8.6 billion of which spot trading volume since 2016 stood at USD3.4 billion, while swap and forward transactions account for USD4.7 billion and USD536 million, respectively.

The Bank highlighted that with the introduction of the dynamic hedging framework and more clarity on the onshore hedging market, increasing volume would be expected over the longer term and this would assure non-resident investors of sustained market liquidity.

The participants also raised concern on reportedly low levels of liquidity in the ringgit FX market since the introduction of the new measures and the ban on non-deliverable forward (NDF) trading. The Bank noted that onshore FX market is going through a period of adjustment and the Central Bank has been more active in supplying liquidity on both sides to address the demand and supply mismatches. Nonetheless, overall, the volume has been sustained where more two-way flows had been observed from resident exporters and importers contributing towards liquidity in the onshore market. When the measures are fully effected, the market would be able to self-intermediate the flows without the need for the Bank to participate actively. 

Fund managers also sought clarifications on the rules relating to onshore hedging. The discussion was focused on the differences between passive hedging and the newly introduced dynamic hedging frameworks. 

The Bank explained that under the passive hedging framework, fund managers are allowed to hedge on transactional or portfolio basis up to 100% of their asset under investments. Fund managers may make incremental increases, rollover as well as net settle the hedges. The Bank shared some examples of acceptable documentary proof under this framework. 

Under the newly introduced dynamic hedging framework, upon registration, fund managers may actively manage their FX position, either buy or sell FX forward, up to net (long or short) 25% of its asset under management. For ease of operations, registered fund managers are not required to show documentary proof when they are transacting in FX forwards with onshore banks. Monitoring of these fund managers’s transactions will be conducted by the Bank through its existing foreign exchange transaction reporting system (ROMS). It was highlighted that fund managers have the flexibility to register at the company level or at individual fund basis. To date, a total of 20 market institutions, consisting of 39 funds, have registered with the Bank.

Regarding after-hours trading, the Bank explained that onshore banks are free to quote FX after Asian closing hours, and took note on the potential need for the market to have sources of onshore market liquidity during the extended trading hours.

The discussion also touched on the Appointed Overseas Office (AOO) Framework and how foreign fund managers can leverage on the AOOs arrangement to access the onshore financial market.  AOOs now cover 19 countries worldwide and further information will be available on the Bank’s website on 1 March 2017.

The fund managers welcomed the engagement session while ASIFMA and GFMA look forward to organise future engagements.

“Based on feedback received from attendees in Singapore, Hong Kong and Bangkok, fund managers find the session to be very engaging, with many questions asked, and clear answers were provided. Many participants are looking forward to conduct more hedging activities onshore after hearing the clear articulation of BNM's policy spirit and direction. ASIFMA expressed its appreciation to be given the opportunity to share their views, in collaboration with our Malaysian member, CIMB Group", said Mr Mark Austen, Chief Executive Officer of ASIFMA and GFMA.    

“Our markets remain open and we welcome the continued participation of foreign fund managers in the onshore ringgit market. With the measures we introduced, we are providing for greater flexibility for investors to invest and manage their foreign exchange risks. The Bank greatly appreciates working with the various industry groups and we welcome future collaboration with the financial industry to further develop the onshore financial market”, says Mr. Adnan Zaylani Mohamad Zahid, Assistant Governor, Bank Negara Malaysia.

For more information, read the attached document.

Bank Negara Malaysia
27 Feb 2017

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