Malaysia’s central bank announced further steps to increase market liquidity, ahead of an expected decision by FTSE Russell in September on whether to retain ringgit bonds in its index.
Businesses will be given greater flexibility to hedge and principal dealers will be required to quote off-the-run bonds to deepen domestic markets, Bank Negara Malaysia said in a statement on Friday. The central bank will also improve ringgit accessibility after onshore trading hours via Appointed Overseas Offices, it said.
Malaysia is stepping up efforts to deepen its financial markets after FTSE Russell said in April it may drop ringgit debt from its index due to concerns about liquidity.
Policy makers rolled out several initiatives in May, but stopped short of lifting a ban on offshore currency trading that some global funds say makes it harder to invest in local assets.
“The measures are very comprehensive and go a long way in addressing concerns about the ability to hedge effectively and about liquidity,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore. “Could FTSE Russell still put up a ‘wish list’ of more unfettered access? Sure. But are there justifiable grounds to remove Malaysia? Surely not.”
The ringgit extended gains after the central bank’s announcement, climbing 0.4% to 4.1775 per dollar in Kuala Lumpur on Friday. Morgan Stanley had said that if Malaysia were dropped from the FTSE gauge, bond outflows may total almost $8bn, based on its weighting of 0.39% and IMF’s estimate that $2tn track the index.
“We have had a very positive engagement with FTSE Russell,” governor Nor Shamsiah Mohd Yunus said in Kuala Lumpur. “They were in town recently and they were very appreciative of the measures that we had in put in place to deepen the onshore market so that real money investors have the required access to hedging onshore.”
Details of the measures announced on Friday are below:
Improved ringgit accessibility after onshore trading hours via Appointed Overseas Offices for non-resident investors and companies.
Principal dealers will quote all off-the-run bonds available under the central bank’s Securities Operations, in addition to existing commitment to provide quotes for benchmark bonds.
Standard documentation guide for FX transactions will be made available. Greater flexibility proposed under revised repo guidelines, including longer tenor limit and wider range of repo securities
The measures below will take effect on August 30:
Resident businesses will be allowed to hedge foreign-currency current-account obligations up to underlying tenure, compared with up to 12 months previously.
Resident treasury centres in Malaysia can hedge on behalf of their related entities with a licensed onshore bank.
Non-resident treasury centres registered with the central bank can hedge on behalf of related entities with licensed onshore banks or Appointed Overseas Offices.
Non-resident businesses can hedge on an anticipatory basis via Appointed Overseas Offices for trade settlement.
Ringgit credit facilities used by companies for miscellaneous expenses are excluded from domestic ringgit borrowing.
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