KL issues warning over offshore futures trading

The Kuala Lumpur City Centre (KLCC) Petronas Twin Towers, right, rise from the skyline of Kuala Lumpur, Malaysia, on Nov 22, 2008.
The Kuala Lumpur City Centre (KLCC) Petronas Twin Towers, right, rise from the skyline of Kuala Lumpur, Malaysia, on Nov 22, 2008.PHOTO: BLOOMBERG

Action will be taken if banks and individuals engage in illegal activities: Bank Negara chief

Malaysia's central bank boss warned yesterday that international banks in the country could face legal action if they facilitate ringgit futures trading offshore.

If "individuals and banks operating hereengage in any illegal activities in contravention (of) the Financial Services Act, we will take action", Bank Negara Malaysia governor Muhammad Ibrahim was quoted as saying in a Reuters report.

Bank Negara had noted last week that the introduction of ringgit futures on the Singapore Exchange (SGX) and the Intercontinental Exchange (ICE), which operates a bourse here, was inconsistent with Malaysia's foreign exchange rules.

In November last year, Bank Negara had forced currency traders overseas to stop driving the ringgit lower and demanded that banks sign a commitment to cease trading the ringgit on the offshore non-deliverable forward market.

The policy was brought in last year to help stem the steep falls in the currency, which the government blamed on forex speculators overseas.

In Singapore, the newly launched ringgit futures contracts are likely to be used as a tool to manage currency risk rather than for speculation, market observers said.

Volumes have not been high. Although ringgit futures contracts were made available here in the middle of last month, only 172 contracts traded on the SGX during that month.

NATURAL DEMAND

Singapore has significant bilateral trade and investment ties and there are many who have ringgit exposure. Therefore, it is only natural that there is demand for more ringgit risk-hedging tools.

MR JULIAN WEE, senior markets strategist for Asia at National Australia Bank, saying that those interested in investing in offshore ringgit futures trading do so because there is greater liquidity in offshore markets.

It is understood that ICE has had only three test trades since its launch of ringgit futures contracts last November.

Mr Julian Wee, senior markets strategist for Asia at National Australia Bank, told The Straits Times that Bank Negara "has long maintained that trading in the ringgit should be tied to trade-related activity and has provided facilities for exporters to fully hedge their forex exposures onshore".

"The bank governor recently asserted that 80 per cent of offshore United States dollar/ringgit trades were for 'speculative' purposes."

Mr Wee added that the bank may also be worried that a panic run on the ringgit in offshore markets might spark some panic in the onshore asset markets.

But he also acknowledged that those interested in investing in offshore ringgit futures trading do so because there is greater liquidity in offshore markets.

"Singapore has significant bilateral trade and investment ties and there are many who have ringgit exposure. Therefore, it is only natural that there is demand for more ringgit risk-hedging tools," he said.

A version of this article appeared in the print edition of The Straits Times on August 19, 2017, with the headline 'KL issues warning over offshore futures trading'. Print Edition | Subscribe