Foreign banks in Malaysia yesterday were trying to work out how to comply with the central bank’s clampdown on offshore ringgit trading, a move the broader market views as a form of capital control.
Form letters, sent this week from onshore banks to their offshore counterparts, asked compliance officers to sign commitments to cease trading the ringgit in non-deliverable forward (NDF) markets and then send the letters back to Bank Negara, Reuters reported on Wednesday.
“There’s a massive back and forth going on between banks and Bank Negara Malaysia now,” said a banker at a foreign bank in Malaysia that deals in foreign currency transactions. “This is a type of indirect capital control... I see a flood of people exiting Malaysia.”
The ringgit fell 1.03 percent yesterday to a fresh 11-month low of 4.3945 ringgit against the US dollar. The offshore spreads in NDF markets widened, while bond yields shot higher with the 10-year benchmark yield trading 17 basis points up at 4.22 percent. It has risen nearly 60 basis points in the past week.
Investors typically use the liquid NDF markets in Singapore and Hong Kong to exchange ringgit for US dollars because of the many restrictions in the domestic market.
Singapore and Hong Kong are ranked third and fourth at US$517 billion and US$437 billion respectively on global daily average turnover of foreign-exchange derivatives, the latest survey by the Bank of International Settlements showed.
The US and Britain are the top two.
While Malaysia allows foreigners relatively open access to its domestic bond and stock markets, it prohibits any offshore trading of its currency or related derivatives.
Some foreign banks said they were told their investments cannot be moved out of Malaysia if they do not sign the letter.
The head of trading at a Western Bank in Hong Kong described the situation as “being in a state of limbo” due to the regulatory uncertainty.
“We have been told that we cannot repatriate our money and our investments stay in Malaysia if we don’t sign,” he said.
The bankers asked for anonymity because of the sensitivity of the subject.
Foreign holdings account for 40 percent of the total outstanding bond market in Malaysia, one of the largest foreign ownerships in Asia.
Foreigners have been fleeing the Malaysian market in a global bond rout following US Republican candidate Donald Trump’s election as president last week, which sent the US dollar soaring and has hit emerging market currencies particularly hard.
Bank Negara Malaysia has asked financial institutions to provide a detailed plan if they need to make ringgit transactions onshore and to seek help from Malaysian financial institutions for any foreign exchange transaction needs.
The central bank said that it could act against lenders that do not comply with the measures.
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