Thursday, August 10, 2017

Ringgit Futures in Singapore

BNM is upset:

BNM Stance on Ringgit Currency Derivatives Products in Offshore Market

The recent introduction of the ringgit futures at the Singapore Stock Exchange (SGX) and the Intercontinental Exchange (ICE) or ICE Futures Singapore is inconsistent with Malaysia’s foreign exchange administration (FEA) policy and rules.

The Malaysian ringgit is a non-internationalised currency and thus, offshore trading of ringgit, in any form whether as a non-deliverable forward traded out of offshore financial centres or as a futures, options and other derivative contracts on exchanges outside of Malaysia, is against Malaysia’s policy.

Bank Negara Malaysia (BNM) would like to remind all market participants to observe the existing FEA rules. Contravention of the FEA is an offence under the Financial Services Act 2013 and Islamic Financial Services Act 2013. Appropriate action under the law will be taken against any person that does not comply with prevailing rules and regulations. Foreign participants should access the onshore ringgit foreign exchange market to meet their financial needs, either directly with onshore licensed financial institutions or their Appointed Overseas Office (AOO).

You can tell they’re upset because the press release came complete with an imposing photo of BNM’s HQ facade, with the central bank’s name looming over you. Big brother is watching.

Anyway, let me try a quick and dirty summary of the issues:

  1. The Ringgit is not an internationalised currency, which means you cannot use the Ringgit to settle transactions overseas (officially that is).
  2. Under the previous NDF market, and now with this futures contract, you could trade on the Ringgit’s value but with settlement in some other currency.
  3. However, the most popular use for Ringgit NDF trading was for hedging or speculative purposes, because you don’t have a lot of regulations or restrictions. It’s over the counter (OTC), which means there’s no organised market, and no regulator or exchange looking over your shoulder.
  4. Malaysia is a small, very open economy, but with a fairly well developed financial system and capital markets. Total trade is roughly 150% of GDP, one of the highest such ratios in the world. So capital flows into and out of the country are very large relative to the economy’s size.
  5. Because of these characteristics, investors buying into Malaysia’s capital markets have tended to buy Ringgit onshore, but hedged their Ringgit exposure offshore. All trade related financial flows were also onshore. So with NDF, there were actually two very different markets for the Ringgit, driven by very different factors – an onshore market which generally had more buyers than sellers, and an offshore market which generated more one way trade (either too many buyers, or too many sellers).
  6. Unfortunately, both these markets interact, as doemstic FX traders take their cues from overnight trading in NDFs. Moreover, as exchange rates are relative prices, the actual prices quoted tend to bear little relation to changes in economic fundamentals, because it’s really relative change that matters, not absolute ones.
  7. Due to this, and because NDF trading was around the clock, the NDF prices tended to dominate the onshore market in the price discovery process – pushing the Ringgit value past reasonable market valuations both on the upswing as well as on downswings.
  8. Which is why BNM has been trying to shut off NDF trading and bring all the speculators and hedging activity onshore. It’s not that the speculation and hedging are harmful – they are after all vital in ensuring the FX market works correctly. But the schism in Ringgit trading was causing a market failure.

Now, as much as BNM might be upset with SGX, they do carry a big stick. Essentially anybody trading in this new instrument will be effectively blacklisted from onshore trading, in much the same way they forced foreign investors off the NDF market. So the only real players in this new instrument will be pure speculators with no onshore presence, and I don’t think there are too many of these.

Just as important, as long as the new Ringgit futures contract is traded during market hours only, the impact on the onshore market would be less damaging. Arbitrage between the onshore and offshore market will happen in real time, rather than the offshore market wandering off on its own and leading everyone down the garden path.

On the whole, I don’t think this new instrument will be as potentially damaging as NDF trading was. It’s still a nuisance though.


  1. In relation to market failures, I see the non-internationalised MYR as the issue. Surely the MYR would be "fairer" priced when it is traded across CME, Euronext, ICE etc?

    1. @C.H.

      I doubt it. You're making the very strong assumption that there would be enough buyers and sellers for price discovery, as well as arbitrageurs to trade away price distortions.

      I just got the trading volume for this futures contract this afternoon - it's so small that pricing on that exchange will more likely be driven by the bigger and more liquid onshore or NDF markets.

    2. @hishamh
      Ah that makes sense, I didn't consider that point earlier.
      Having said that, last I checked Bursa Derivatives don't offer ringgit futures. It is the forward contract that's available onshore isn't it?

      Thanks for replying and for the educational post.

    3. @CH

      The way I see it, the futures contract isn't all that useful to the bigger players, since they have access to the OTC market, which would be cheaper and more customisable to their needs. Future's are more likely to attract retail investors more than anybody else - most institutional funds won't even have a mandate to trade in currency.

  2. Are the players the SGX ringgit futures transparent? I was wondering on the potential for them to enter hedges at SGX while being exposed to the Malaysian fixed income market as before. -MN

    1. @MN

      Technically, somebody could do that. The question is why would they want to. I don't think liquidity would be sufficient for volume hedging, and the contract size is pretty small (only RM500k).

      Actually, I don't see any trades at all: