Bank Negara acts on liquidity issues in forex market

PETALING JAYA: Bank Negara said steps are being taken to address liquidity issues in the foreign exchange (forex) market amid complaints by investors from overseas that there aren’t enough US dollars in the onshore market for them to hedge their investment risks.

The lack of liquidity has been made worse since Bank Negara imposed, in December last year, the ban on non-deliverable forward trading. “The onshore forex 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,” Bank Negara said in a statement yesterday. It added that the volume has been sustained, where more two-way flows have been observed from resident exporters and importers, contributing towards liquidity in the onshore market. “When the measures are fully affected, the market would be able to self-intermediate the flows without the need for Bank Negara to participate actively,” said the central bank. The central bank added that the overall forex turnover has averaged around US$2.5 trillion over the past four years.

The daily market volume is a measure that indicates the ability of participants to transact in the forex market.

The average daily trading volume is US$8.6bil, of which the spot trading volume since 2016 has stood at US$3.4bil, while swap and forward transactions account for US$4.7bil and US$536mil, respectively.

Bank Negara said 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. “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 forex risks,” Bank Negara assistant governor Adnan Zaylani Mohamad Zahid said in the statement.

Bank Negara was featured in a forex hedging workshop organised by CIMB Bank on Feb 24. About 60 foreign fund managers participated in the workshop. At the event, Bank Negara explained that under the passive hedging framework, fund managers are allowed to hedge on a transactional or portfolio basis up to 100% of their assets under investment. Fund managers may make incremental increases, rollover as well as net settle the hedges.

Under the newly introduced dynamic hedging framework, upon registration, fund managers may actively manage their forex positions, either buy or sell forex forward up to net (long or short) 25% of their assets under management. For ease of operations, registered fund managers are not required to show documentary proof when they are transacting in forex forwards with onshore banks. Monitoring of these fund managers’ transactions will be conducted by the central bank through its existing forex transaction reporting system or ROMS. It was highlighted that fund managers have the flexibility to register at the company level or on an individual fund basis.

To date, a total of 20 market institutions, consisting of 39 funds, have registered with Bank Negara.

Bank Negara also said that onshore banks are free to quote forex after the Asian closing hours.

Meanwhile, a Reuters report said foreign investors were shying away from the Malaysian bond market because they were finding it difficult to hedge their positions. Analysts at Nomura said November-to-January capital outflows from Malaysia hit a record for a three-month period, when RM27.9bil (US$6.3bil) of foreign cash upped and left.

Foreign holdings of Government bonds fell to 46% of the total outstanding value, from 51.6% in October.