Bank Negara Malaysia’s initiatives to develop the onshore financial market
Broadening and deepening of the onshore foreign exchange market
Following the measure to reinforce existing rules that have been in place to prohibit facilitation of ringgit non-deliverable forward (NDFs) offshore, the Financial Markets Committee, in collaboration with Bank Negara Malaysia (BNM) has announced several initiatives and measures to enhance the liquidity of the foreign exchange (FX) market, including deregulate the onshore ringgit hedging with effect from 5 December 2016. The measures are as follow:
1. Liberalisation and deregulation of the onshore ringgit hedging market
- To provide greater flexibility for managing foreign exchange (FX) risks, residents (including resident fund managers) may freely and actively hedge their USD and CNH exposures up to a limit of RM6 million based on total outstanding of net ringgit position (notional) at any one time, per client, per bank, subject to a one-time declaration of non-participation in speculative activity. This flexibility allows residents to cancel and unwind the forward contract entered for hedging exceeding RM6 million, the normal due diligence process by the onshore bank applies.
- Resident and non-resident fund managers can now actively manage their FX exposure up to 25% of their invested assets on a net position basis. To qualify for this arrangement, registration with BNM would suffice. The investor is allowed to fully hedge their investment. For hedging more than 25% ringgit investment would require documentary evidence.
- To broaden accessibility of foreign investors and corporates to the onshore FX market, offshore non-resident financial institutions may participate in the Appointed Overseas Office 1 (AOO) framework which will be accorded additional flexibilities on ringgit transactions. These flexibilities include FX hedging (own account/on behalf of client) for current and financial account based on commitment, opening of ringgit account (bookkeeping) and extension of ringgit trade financing.
2. Streamlining treatment for investment in foreign currency assets
- Resident entities with domestic ringgit borrowing are free to invest in foreign currency assets both onshore and abroad up to the prudential limit of RM50 million.
- Residents without domestic ringgit borrowing shall continue to enjoy flexibility of investing in foreign currency assets both onshore and abroad up to any amount.
- This gives equal treatment for residents with ringgit borrowings investing in foreign currency assets whether in the onshore or offshore market.
3. Incentives and treatment of export proceeds
- Exporters can retain up to 25% of export proceeds in foreign currency. They may hold higher balances with approval from BNM to meet their obligations in foreign currency.
- Payment by resident exporters for settlement of domestic trade in goods and services is now to be made fully in ringgit.
- All ringgit proceeds from exports can earn a higher rate of return via a special deposit facility. The special deposit facility for ringgit proceeds will be offered to exporters via all commercial banks and receive a rate of 3.25% per annum. This facility will be offered until 31 December 2017 subject to further review.
- In addition to the newly announced hedging measures, exporters are also able to hedge and unhedged up to 6 months of their foreign currency obligations.
