Malaysia to Ease Onshore Hedging Rules as Currency Slides

(Bloomberg) -- Malaysia said it would provide greater hedging flexibility in its onshore currency market after the central bank’s moves last month to discourage speculators saw the ringgit tumble toward its weakest since 1998.

Overseas and domestic fund managers will be allowed to manage their foreign exchange exposure of as much as 25 percent of invested assets, the central bank said in a statement on Friday. It said it would ensure there will be "continuous liquidity of foreign currency" in the onshore market. 

The central bank also said exporters can now hold only as much as 25 percent of export proceeds in foreign currency unless they get its approval for bigger amounts. That compares with 100 percent previously. Foreign currency arising from conversion of export proceeds will be used to ensure continuous liquidity in the onshore market, it said. The changes will take effect Monday.

"These measures are intended to promote a deeper, more transparent and well-functioning onshore FX market where genuine investors and market participants can effectively manage their market risks with greater flexibility to hedge on the onshore market," the committee said. "A deep and liquid onshore FX market will enable investors to better manage against volatile currency movements."

Malaysia is seeking to arrest a slump in investor confidence after a crackdown on trading in the offshore, non-deliverable forwards market last month hurt sentiment. The ringgit has lost 6 percent in the past month, one of the worst performances among emerging Asian currencies. It touched 4.4707 per dollar in Kuala Lumpur on Thursday, within 0.2 percent of the weakest level since the depths of the Asian financial crisis more than 18 years ago.

Currency Intervention

The central bank is intervening in the onshore ringgit market, Assistant Governor Adnan Zaylani told reporters in Kuala Lumpur.

"We are providing liquidity to the market and we will continue to do so even going forward if it’s necessary to maintain because we do need to sustain the market liquidity," Adnan said. "And as this goes into implementation, of course it’s still a transition period. So if there’s a need, certainly Bank Negara will provide that liquidity."

These are some other measures announced on Friday:

  • Residents, including resident fund managers, may freely and actively hedge their U.S. dollar and offshore yuan exposures up to a limit of 6 million ringgit per client per bank
  • Offshore non-resident financial institutions may participate in the Appointed Overseas Office framework which will be accorded additional flexibilities on ringgit transactions. These flexibilities include foreign exchange hedging of own accounts or on behalf of clients for current and financial accounts based on commitment, opening of ringgit account and extension of ringgit trade financing
  • Resident entities with domestic ringgit borrowings are free to invest in foreign currency assets both onshore and abroad up to the prudential limit of 50 million ringgit

Bank Negara Malaysia warned foreign banks last month against using offshore forwards to bet against the ringgit and vowed to limit speculation. Governor Muhammad Ibrahim has blamed speculators in the “opaque” offshore non-deliverable forwards market for compounding the ringgit’s weakness, saying the currency’s pricing “should never be disconnected from real economic activities in the onshore market.”

The move to clamp down on offshore forwards has raised the specter of capital controls which Malaysia employed in the late 1990s, even after the central bank called such fears ‘‘baseless.”

Bank Negara’s efforts to curb speculation come as rising bets for higher U.S. interest rates erode the appeal of developing-nation assets. The yield on 10-year ringgit notes recorded its biggest monthly increase since 2009 in November and reached an eight-year high this week.