Business

Monday February 13, 2012

New forex rules need monitoring

By DALJIT DHESI
daljit@thestar.com.my


PETALING JAYA: The liberalisation of the rules on the use and conversion of foreign exchange (forex), which came into effect on Jan 31, needs close monitoring to avoid possible systemic risk to the financial system, observers say.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said that the volume and nature of the cross-border financial flows following the liberalisation would have to be monitored closely.

Zahidi: ‘The rules can potentially improve options for domestic wealth management.’

“In the recent global financial crisis, the high level of corporate and banks' distress in Europe and the US was caused by large exposures to foreign assets and overseas counter-party risks related to the huge cross-border financial flows.

“Although Malaysian institutions may not be directly involved, any distress in foreign entities domiciled here will have a knock-on effect on the domestic financial system, as this may involve the pull-out or repatriation of capital.

“At the minimum, this may weaken sentiment and cause higher volatility in the financial markets,'' he told StarBiz.

The new measures, part of the broad thrust of the financial sector blueprint, allows a resident to buy and sell foreign currencies and such transactions would be undertaken by a licensed onshore bank.

The rules only allow transactions involving one foreign currency against another and not for the trading in a foreign currency against the ringgit. A resident is only allowed to buy and sell foreign currency against the ringgit with a licensed onshore bank on a spot and forward basis.

A licensed onshore bank is also now allowed to offer ringgit-denominated interest rate derivatives to a non-bank non-resident. Ringgit-denominated interest rate derivatives include interest rate futures, options and swaps.

Yeah said that on the whole the move was a laudable as it would facilitate financial transactions not only for foreign financial institutions operating in the country but also domestic ones that were enlarging their international footprint and may need to handle multi-directional financial flows in the region and globally.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said the measures would benefit the domestic financial market and the economy in several ways, one of which would be to improve options for corporate forex hedging to control the risks of exposure, especially in view of increasing volatility in the forex market.

Yeah: ‘Any distress in foreign entities domiciled here will have a knock-on effect on the domestic financial system.’

“It will also enhance Malaysia as a portfolio investment destination because foreign investors look for innovative products and liberalisation measures in the financial market.

“Moreover, the rules can potentially improve options for domestic wealth management and increase domestic banking fee income through innovative products as well as strengthen the position of domestic banks in regional markets,” he said.

Commenting on the move to allow onshore banks to offer ringgit-denominated interest rate derivatives to non-bank non-residents, Standard Chartered Bank Malaysia country head of global markets Leon Koay said that it would enlarge onshore banks' ability to reach out to regional investors and institutions that had ringgit portfolios.

“Malaysia continues to grow as an important reference point for investor portfolios for Asia, and this measure offers increased flexibility to investors and institutions that wish to include ringgit assets in their investment portfolios.

“It also widens and deepens the pool of participants in the onshore interest rate derivatives market and is conducive to enhanced market liquidity.

“The size of the ringgit interest rate derivatives market is currently estimated at around RM450bil to RM500bil, and has been growing at a rate of 15% to 20% over the last three to four years. This measure should contribute to continued strong growth for the segment going forward,'' Koay said.

OCBC Bank (M) Bhd head of global treasury Ng Seow Pang, meanwhile, feels that the liberalisation is a way to relax the regulations step by step in response to the demands of local clients who were getting more sophisticated.

Ng said the local financial industry would have to step up to these challenges or risk being left behind by regional rivals.

He said the liberalisation of the new rules would, at the same time, allow the market to do more in terms of risk management.

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