Tuesday, November 29, 2011

BNM and MAS: The Ties That Bind

Bank Negara and the Monetary Authority of Singapore have just signed an agreement:

Memorandum of Understanding between Bank Negara Malaysia and the Monetary Authority of Singapore

The Monetary Authority of Singapore (MAS) and Bank Negara Malaysia (BNM) jointly announced today the signing of a Memorandum of Understanding (MoU) to establish a cross-border collateral arrangement aimed at enhancing liquidity facilities to financial institutions in both countries...

...Under this arrangement, eligible financial institutions operating in Singapore may obtain Singapore Dollar (SGD) liquidity from MAS by pledging Malaysian Ringgit (MYR) or Ringgit-denominated sovereign and central bank securities with MAS. Similarly, eligible financial institutions operating in Malaysia may obtain MYR liquidity from BNM by pledging SGD or SGD-denominated sovereign and central bank securities.

They’re not getting married, but to all intents and purposes its like being BFF. In practical terms what this agreement does is solidify the already close financial ties between Malaysia and Singapore – our banks are over there and their banks are over here, and since the MYR/SGD exchange rate is the next best thing to a fixed exchange rate, you might as well treat the currencies as interchangeable even if the Ringgit isn’t in theory convertible outside Malaysian borders.

I also can’t help thinking this is all another prudential step in case the Euro debt crisis flares up into another global credit crunch a’la 2008, to go along with existing Asian central bank swap agreements. In this case, this puts some of the burden on the banking system itself rather than the central bank in ensuring forex liquidity. Admittedly this is  a minor point as, if disaster does await us, it’ll be manifested as US dollar demand, not local currency demand. But every little insurance policy helps.

1 comment:

  1. bro hishamh

    the MYR Securities stays in BNM Rentas, the same for SGD Securities in MAS.

    Both CB will have a central depository link via opening a Main Account in each system (ie MAS becomes Authorized Depository Agent in RENTAS)

    Securities will then be transferred into these main account during the "pledge", if there is a need to execute collateral by each CB then execution is done in the domestic market.

    Liquidity facility is repaid in the respective currency. FX Risk should be embedded in the Collateral and Margin Requirements during the life of the trade by either topping up additional securities or reducing the exposure in the domestic currency against the lender (CBs)