## 1. Recent FX Market Measures in Malaysia

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### I. Background and motivation
- Role of local currency public debt markets:
  - Provide more stable budget financing, financial deepening, and opportunities for resident wealth accumulation free of foreign exchange rate risk.
- Effects of foreign (nonresident) investment:
  - Typically results in lower yields and deeper liquidity, diversifying the investor base.
  - Can increase price and exchange rate volatility, creating a tradeoff between lower yields and higher volatility.
- Key literature findings cited:
  - Andritzky (2012): a 1 percent increase in nonresident share associated with a 3–4 basis point drop in yields; small but significant relationship between foreign participation and volatility.
  - Peiris (2010): a 1 percent increase in foreign investor share associated with an average 6-basis point reduction in yields; no evidence that foreign participation raises volatility.
  - Global factors (risk aversion, advanced-economy interest rates) and structural forces (institutional investors, portfolio diversification, institutional changes) matter for debt and equity flows.
  - Integration of global bond markets may both amplify co-movement and act as a stabilizing force (“virtuous cycle”).
- Malaysia-specific context:
  - Nonresident holdings in conventional MGS reached 52 percent of outstanding stock (17 percent of GDP) in October 2016.
  - MGS market experienced significant reversal of inflows after the 2016 U.S. presidential election, putting pressure on the exchange rate.

### II. Recent developments in Malaysia’s bond markets
- Market structure and auction results (Q1, 2018 selected):
  - 1/5/2018 — 2.00 — 1.91 (20-year MGS Reopen)
  - 1/15/2018 — 4.00 — 2.58 (5-year MGII Reopen)
  - 1/29/2018 — 2.50 — 2.47 (15-year MGS Reopen)
  - 2/7/2018 — 3.00 — 2.28 (7.5-year MGII New)
  - 2/28/2018 — 3.50 — 2.07 (10-year MGS Reopen)
  - 3/9/2018 — 1.50 — 2.07 (30-year MGII Reopen)
  - 3/14/2018 — 3.00 — 2.35 (7-year MGS New)
  - 3/23/2018 — 2.50 — 2.00 (15-year MGII Reopen)
  - 30/03/2018 — 3.00 — 1.72 (3-year MGS Reopen)
- Government bond issuance (in billion MYR), selected series (2013–2018E/F):
  - Gross issuance — MGS: 59, 57, 54, 44, 54, 53 (2013, 2014, 2015, 2016, 2017E, 2018F)
  - Gross issuance — GII: 41, 34, 41, 43, 53, 53
  - Gross issuance — Total: 100, 91, 95, 86, 107, 107
  - Redemptions — MGS: 47, 33, 44, 26, 47, 39
  - Redemptions — GII: 12, 21, 13, 22, 20, 28
  - Redemptions — Total: 59, 53, 56, 48, 67, 67
  - Net issuance — MGS: 13, 25, 10, 17, 7, 14
  - Net issuance — GII: 29, 13, 29, 21, 33, 26
  - Net issuance — Total: 42, 38, 39, 38, 40, 40
- Ownership and market features:
  - Nonresident holders: asset managers ~40 percent of total nonresident holdings; central banks and governments, pension funds, and commercial banks follow.
  - Efficient foreign exchange derivatives market supported attraction of a wider range of foreign investors.
  - Malaysia has the largest Islamic bond market in the world; net issuance of MGIIs overtook conventional debt in 2015.
- Risks and maturity profile:
  - Ringgit-denominated securities comprise approximately 95 percent of the stock, limiting FX risk.
  - All domestic debt is in fixed-rate instruments.
  - Relatively low average life to maturity: Original maturity 8.1 years, remaining maturity 5.1 years.
- Volatility and flows:
  - Volatility of flows higher than regional peers since the Global Financial Crisis amid global capital flow surges.
  - Nonresidents’ share in MGS fell to 38.5 percent by March 2017 (2017Q1), driven largely by asset managers.
  - Malaysia’s weight in JP Morgan GBI EM global diversified index fell from 9 percent at end-2016 to 7½ percent at end-March 2017, and to 5.6 percent as of December 2017.
- Policy measures and outcomes (December 2016 and H1 2017):
  - Measures included required conversion into ringgits of 75 percent of export proceeds; extending prudential limits on foreign currency investments by residents with domestic ringgit borrowing; enhanced hedging opportunities; improved turnover in onshore spot/forward/swap FX markets; narrower bid-ask spreads; reduced ringgit volatility.
  - Nonresident inflows into MGS resumed in 2Q 2017; by December 2017 nonresidents’ share rose to about 45 percent of outstanding stock.

### III. Analytical model and empirical findings
- Structural supply and demand setup (estimated quarterly 2005Q1–2017Q2):
  - Supply: bondi_t = α0 − α1 dMGS_t + α2 BB_t + α3 Controls_t + ε_t
  - Demand: dMGS_t = β0 + β1 bondi_t − β2 VIX_t + β3 Controls_t + v_t
  - Definitions:
    - bondi: Nominal yield on 1-year MGS (annualized)
    - BB: General government budget balance (percent of GDP)
    - dMGS: Net change in NR position in MGS market (percent of GDP)
    - VIX: Global stock market volatility index
- Identification and estimation:
  - Two-Stage Least Squares (2SLS) with Prais–Winsten transformation to address autocorrelation.
  - Prais–Winsten raised Durbin–Watson statistic in the first stage from 0.69 to 1.93.
  - Control variables: USrate (nominal yield on 1-year US Treasury, annualized), Inflation (CPI, annualized), Debt (general government debt, percent of GDP), Depreciation (log ringgit/US$ ratio), StdevFX (std. dev. of daily ringgit/US$ within quarter).
  - Dummy variables: PostGFCdummy, TtantrumDummy, PostMeasuresDummy.
- Key 2SLS empirical findings:
  - Bond yields respond to supply and demand factors as expected: public debt, US Treasury bond rate, and CPI inflation have expected signs and are statistically significant.
  - Nonresident flows respond to domestic/pull factors (debt, inflation, depreciation, exchange rate volatility) and foreign/push factors (VIX, US Treasury yields), indicating sensitivity to risk aversion.
  - Nonresident flows are strongly deterred by foreign exchange volatility (StdevFX) and expected depreciation (Depreciation).
  - Policy dummy estimates (final 2SLS column):
    - TtantrumDummy coefficient: -0.115** (significant)
    - PostMeasuresDummy coefficient: -0.230*** (significant)
    - The (negative) coefficient on PostMeasuresDummy is twice as large as the one on TtantrumDummy.
  - First-stage fitted value coefficient: Bondihat 0.050^ (t-stat 1.55) in final specification.
- GARCH analysis of capital flows vs. volatility (monthly June 2005–October 2017):
  - Model:
    - Depreciation equation: ln(e_t / e_{t−1}) = μ + time + ε_t
    - Variance equation: ω_t^2 = αβ0 + α1 ε_{t−1}^2 + α2 ω_{t−1}^2 + α3 dMGS_t + v_t
  - Estimation results (Table 5 summaries):
    - Baseline: contemporaneous dMGS associated with lower exchange rate volatility (dMGS coefficient -0.0006***, z = -3.55).
    - Lagged dMGS (dMGSlag) is statistically insignificant (coefficient 0.00044, z = 1.07).
    - Crude oil price change effect on depreciation: -0.064*** (z = -4.96).
    - ARCH ~ 0.23 (significant); GARCH ~ 0.51–0.67 (significant).
  - GARCH-based conclusions:
    - Exchange rate volatility exhibits persistence: both α1 (ARCH) and α2 (GARCH) positive and significant.
    - No robust evidence that nonresident flows causally increase exchange rate volatility once contemporaneous policy effects and lagging are considered.
    - Crude oil price changes affect devaluation and volatility.
    - Exchange rate volatility has increased since the start of the Global Financial Crisis (PostGFCdummy positive and significant in variance equation in one specification).

### IV. Conclusions, policy implications, and suggestions for future research
- Empirical conclusions:
  - Malaysian public debt market responds to domestic and global factors as expected.
  - No firm direct evidence that nonresident flows cause observed onshore exchange rate volatility beyond what can be smoothed by policy intervention.
  - Exchange rate volatility shows significant path-dependency and has risen since the Global Financial Crisis.
  - Terms-of-trade shocks (e.g., crude oil price fluctuations) materially affect exchange rate movements and volatility.
  - Nonresident activity in NDF markets could be an additional source of onshore ringgit/USD pressure; controlling for this channel remains for future research.
- Market resilience and buffers:
  - Large institutional domestic investor base has helped maintain orderly conditions despite sizable nonresident holdings of MGS.
  - Wider fiscal/treasury buffers would help sustain these conditions; costs of buffers may be viewed as an insurance premium against large-scale selloffs.
- Suggestions for future research:
  - Test asymmetry by using an asymmetric GARCH model to examine inflows vs. outflows.
  - Explicitly control for other factors affecting FX volatility (e.g., FDI flows, foreign exchange derivative markets, NDF activity) to better isolate the impact of nonresident investors.

### Appendix — Key dates and policy measures (selected)
- Key dates:
  - December 2, 2016: FMC announced package to foster development of onshore FX markets.
  - December 5, 2016: Resident exporters measure effective.
  - December 14, 2017: BNM announced the special facility will be discontinued by year-end.
  - March 31, 2018: Outstanding balances in the facility can continue earning 3.1 percent interest up to this date.
  - April 2017 / May 2, 2017: Second series of initiatives announced by the FMC came into effect.
  - November 17 (year not specified in excerpt): BNM Governor announced further measures at an event.
- December 2016 FMC measures (high-level highlights):
  - Institutional investors can dynamically take onshore forward positions on a portfolio basis up to 25 percent of foreign currency or ringgit-denominated assets without documentary evidence; one-time registration with BNM required.
  - Residents can hedge foreign currency exposures and cancel hedging positions for US$/MYR and CNH/MYR with a licensed onshore bank without documentary evidence up to an aggregate net open position limit of 6 million ringgits per licensed onshore bank; participants must give a one-time declaration of hedging intent.
  - Resident exporters can retain up to 25 percent in foreign currency proceeds from their exports of goods; converted amounts could be deposited in a special facility earning 3.25 percent and available until end-2017. Exporters can reconvert export proceeds to meet projected loans, imports, and other current account obligations for up to six months ahead.
  - Prudential limits on foreign currency investments by residents with domestic ringgit borrowing extended to include FC investments onshore and apply to all residents with ringgit borrowing.
  - Enhanced enforcement: onshore banks engaging in ringgit foreign exchange transactions required to obtain attestation from non-resident banks of non-participation in the NDF market.
- April 2017 / May 2, 2017 FMC initiatives:
  - Registered investors can fully hedge and actively manage their exposures including unwinding of hedging positions—up to 100 percent (from 25 percent) of their underlying assets.
  - The aggregate net open position limit of 6 million ringgits per client per bank without documentary evidence expanded to include GBP, EUR, and JPY (in addition to US$ and CNH).
  - Principles for a Fair and Effective Financial Market and a Code of Conduct for Malaysian Wholesale Financial Markets were issued.
  - Regulated short-selling framework liberalized to allow all residents to participate in short-selling activities to improve liquidity in MGS and facilitate hedging of interest rate risk.
  - RENTAS enhanced via development of segregated securities accounts up to fund manager level to ease reporting burden on custodians and provide real-time information for surveillance purposes.
- Measures announced by BNM Governor (November 17 event):
  - Extend the short-selling framework to Malaysian government investment issues (MGII) by both conventional and Islamic banks.
  - Expand eligible collateral for liquidity operations with the BNM to include Bankers Acceptances (BAs) and Negotiable Instruments of Deposits (NIDs) issued by AAA-rated onshore licensed banks.
  - Introduce Bank Negara Interbank Bills (BNIBs) in ringgit and foreign currency, made available to onshore banks through auctions to manage ringgit and foreign currency liquidity and interest rate exposures.

*Source: IMF Working Paper — chapter “1. Recent FX Market Measures in Malaysia” (selected content).*

### References ________________________________________________________________15

### References ________________________________________________________________15

### Figures
- 1. Nonresident Investments in Government Securities in Select Asian Countries __________7
- 2. Debt Market Flows and Foreign Share in Select Ems _____________________________8
- 3. Actual vs. Fitted Values of Dependent Variables ________________________________11

### Tables
- 1. Malaysia: Select Public Debt Auction Results (Q1, 2018) __________________________6
- 2. Government Bond Issuance (in billion MYR) ___________________________________7
- 3. Central Government Debt in Select Asian Countries (as of December 2016) __________11
- 4. Two-stage Least Squares (2SLS) Regression Results ____________________________11
- 5. GARCH Model Estimation Results __________________________________________13

### Appendix
- APPENDIX

*Source: wp1923 - References ________________________________________________________________15*

### 1. Recent FX Market Measures in Malaysia ______________________________________17

### 1. Recent FX Market Measures in Malaysia

### I. Background and motivation
- Well-functioning local currency public debt markets provide more stable budget financing, financial deepening, and opportunities for resident wealth accumulation free of foreign exchange rate risk.
- Foreign (nonresident) investment:
  - Typically results in lower yields and deeper liquidity, diversifying the investor base.
  - Can increase price and exchange rate volatility, creating a tradeoff between lower yields and higher volatility.
- Literature highlights:
  - Andritzky (2012): a 1 percent increase in nonresident share associated with a 3–4 basis point drop in yields; small but significant relationship between foreign participation and volatility.
  - Peiris (2010): a 1 percent increase in foreign investor share associated with an average 6-basis point reduction in yields; no evidence that foreign participation raises volatility.
  - Global factors (risk aversion, advanced-economy interest rates) are important drivers of debt and equity flows; structural forces (institutional investors, portfolio diversification, institutional changes) also matter.
  - Integration of global bond markets may both amplify co-movement and act as a stabilizing force (“virtuous cycle”).
- Malaysia context:
  - Nonresident holdings in conventional MGS reached 52 percent of outstanding stock (17 percent of GDP) in October 2016.
  - MGS market experienced significant reversal of inflows after the 2016 U.S. presidential election, putting pressure on the exchange rate.

### II. Recent developments in Malaysia’s bond markets
- Market structure and issuance:
  - The MGS market is one of the most liquid local government debt markets globally; recent auctions show healthy bid-to-cover (BTC) ratios across maturities (Q1, 2018).
  - Selected Q1 2018 auction results (Issuance Date — Amount (RM bil.) — BTC ratio):
    - 1/5/2018 — 2.00 — 1.91 (20-year MGS Reopen)
    - 1/15/2018 — 4.00 — 2.58 (5-year MGII Reopen)
    - 1/29/2018 — 2.50 — 2.47 (15-year MGS Reopen)
    - 2/7/2018 — 3.00 — 2.28 (7.5-year MGII New)
    - 2/28/2018 — 3.50 — 2.07 (10-year MGS Reopen)
    - 3/9/2018 — 1.50 — 2.07 (30-year MGII Reopen)
    - 3/14/2018 — 3.00 — 2.35 (7-year MGS New)
    - 3/23/2018 — 2.50 — 2.00 (15-year MGII Reopen)
    - 30/03/2018 — 3.00 — 1.72 (3-year MGS Reopen)
  - Malaysia has the largest Islamic bond market in the world; net issuance of MGIIs overtook conventional debt in 2015.
- Government bond issuance (in billion MYR), selected series (2013–2018E/F):
  - Gross issuance — MGS: 59, 57, 54, 44, 54, 53 (2013, 2014, 2015, 2016, 2017E, 2018F)
  - Gross issuance — GII: 41, 34, 41, 43, 53, 53
  - Gross issuance — Total: 100, 91, 95, 86, 107, 107
  - Redemptions — MGS: 47, 33, 44, 26, 47, 39
  - Redemptions — GII: 12, 21, 13, 22, 20, 28
  - Redemptions — Total: 59, 53, 56, 48, 67, 67
  - Net issuance — MGS: 13, 25, 10, 17, 7, 14
  - Net issuance — GII: 29, 13, 29, 21, 33, 26
  - Net issuance — Total: 42, 38, 39, 38, 40, 40
- Ownership and market features:
  - Nonresident holders: asset managers ~40 percent of total nonresident holdings; central banks and governments, pension funds, and commercial banks follow.
  - Efficient foreign exchange derivatives market helped attract a wider range of foreign investors.
- Risks and maturity profile:
  - Ringgit-denominated securities comprise approximately 95 percent of the stock, limiting FX risk.
  - All domestic debt is in fixed-rate instruments.
  - Relatively low average life to maturity: Original maturity 8.1 years, remaining maturity 5.1 years (Malaysia, compared with peers).
- Volatility and flows:
  - Volatility of flows higher than regional peers since the Global Financial Crisis amid global capital flow surges.
  - Nonresidents’ share in MGS fell to 38.5 percent by March 2017 (2017Q1), driven largely by asset managers.
  - Malaysia’s weight in JP Morgan GBI EM global diversified index fell from 9 percent at end-2016 to 7½ percent at end-March 2017, and to 5.6 percent as of December 2017.
- Policy measures (December 2016 and H1 2017) by Bank Negara Malaysia (BNM):
  - Required conversion into ringgits of 75 percent of export proceeds.
  - Extended prudential limits on foreign currency investments by residents with domestic ringgit borrowing to resident exporters previously exempted.
  - Intended to enhance onshore FX liquidity; outcomes included increased hedging opportunities, improved turnover in onshore spot/forward/swap FX markets, narrower bid-ask spreads, and reduced ringgit volatility.
  - Nonresident inflows into MGS resumed in 2Q 2017; by December 2017 nonresidents’ share rose to about 45 percent of outstanding stock.

### III. Analytical model

Determinants of capital flows (estimation framework)
- Structural supply and demand setup:
  - Supply: bondi_t = α0 − α1 dMGS_t + α2 BB_t + α3 Controls_t + ε_t
  - Demand: dMGS_t = β0 + β1 bondi_t − β2 VIX_t + β3 Controls_t + v_t
  - Definitions:
    - bondi: Nominal yield on 1-year MGS (annualized)
    - BB: General government budget balance (percent of GDP)
    - dMGS: Net change in NR position in MGS market (percent of GDP)
    - VIX: Global stock market volatility index
- Identification and estimation:
  - Two-Stage Least Squares (2SLS) with Prais–Winsten transformation to address autocorrelation (quarterly data 2005Q1–2017Q2).
  - Prais–Winsten raised Durbin–Watson statistic in the first stage from 0.69 to 1.93.
  - Control variables: USrate (nominal yield on 1-year US Treasury, annualized), Inflation (CPI, annualized), Debt (general government debt, percent of GDP), Depreciation (log ringgit/US$ ratio), StdevFX (std. dev. of daily ringgit/US$ within quarter).
  - Dummy variables: PostGFCdummy, TtantrumDummy, PostMeasuresDummy.
- Key empirical findings (based on Table 4 and model diagnostics):
  - Bond yields respond to supply and demand factors as expected: public debt, US Treasury bond rate, and CPI inflation have expected signs and are statistically significant.
  - Nonresident flows respond to domestic/pull factors (debt, inflation, depreciation, exchange rate volatility) and foreign/push factors (VIX, US Treasury yields), indicating sensitivity to risk aversion.
  - Nonresident flows are strongly deterred by foreign exchange volatility (StdevFX) and expected depreciation (Depreciation).
  - Policy dummy estimates (final 2SLS column):
    - TtantrumDummy coefficient: -0.115** (significant)
    - PostMeasuresDummy coefficient: -0.230*** (significant)
    - The (negative) coefficient on PostMeasuresDummy is twice as large as the one on TtantrumDummy.
  - First-stage fitted value coefficient reported: Bondihat 0.050^ (t-stat 1.55) in final specification.

Capital flows vs. volatility (GARCH analysis)
- Data and method:
  - Monthly series for June 2005–October 2017.
  - Standard GARCH(1,1) setup:
    - Depreciation equation: ln(e_t / e_{t−1}) = μ + time + ε_t
    - Variance equation: ω_t^2 = αβ0 + α1 ε_{t−1}^2 + α2 ω_{t−1}^2 + α3 dMGS_t + v_t
- Estimation results (Table 5 summaries):
  - Baseline: contemporaneous dMGS associated with lower exchange rate volatility (dMGS coefficient -0.0006***, z = -3.55).
  - Replacing contemporaneous dMGS with lagged dMGS makes the relationship statistically insignificant (dMGSlag coefficient 0.00044, z = 1.07).
  - Inclusion of crude oil price change:
    - Crude oil price change coefficient on depreciation: -0.064*** (z = -4.96).
  - ARCH and GARCH terms:
    - ARCH ~ 0.23 (significant)
    - GARCH ~ 0.51–0.67 (significant)
- GARCH-based conclusions:
  - Exchange rate volatility exhibits persistence: both α1 (ARCH) and α2 (GARCH) positive and significant.
  - No robust evidence that nonresident flows causally increase exchange rate volatility once contemporaneous policy effects and lagging are considered.
  - Crude oil price changes affect devaluation and volatility.
  - Exchange rate volatility has increased since the start of the Global Financial Crisis (PostGFCdummy positive and significant in variance equation in one specification).

### IV. Conclusions and policy implications
- Empirical conclusions:
  - Malaysian public debt market responds to domestic and global factors as expected.
  - No firm direct evidence that nonresident flows cause observed onshore exchange rate volatility beyond what can be smoothed by policy intervention.
  - Exchange rate volatility shows significant path-dependency and has risen since the Global Financial Crisis.
  - Terms-of-trade shocks (e.g., crude oil price fluctuations) materially affect exchange rate movements and volatility.
  - Nonresident activity in NDF markets could be an additional source of onshore ringgit/USD pressure; controlling for this channel remains for future research.
- Market resilience and buffers:
  - Large institutional domestic investor base has helped maintain orderly conditions despite sizable nonresident holdings of MGS.
  - Wider fiscal/treasury buffers would help sustain these conditions; costs of buffers may be viewed as an insurance premium against large-scale selloffs.
- Suggestions for future research:
  - Test asymmetry by using an asymmetric GARCH model to examine inflows vs. outflows.
  - Explicitly control for other factors affecting FX volatility (e.g., FDI flows, foreign exchange derivative markets, NDF activity) to better isolate the impact of nonresident investors.

*Source: IMF Working Paper — chapter “1. Recent FX Market Measures in Malaysia” (selected content).*

### References

### wp1923 - References

### References
- Andritzky, Jochen, 2012. “Government Bonds and Their Investors: What Are the Facts and Do They Matter?”, IMF Working Paper 12/158 (Washington: International Monetary Fund).
- Arslanalp, Serkan and Takahiro Tsuda, 2014. “Tracking Global Demand for Emerging Market Sovereign Debt,” IMF Working Paper 14/39 (Washington: International Monetary Fund).
- Bollerslev, Tim, 1986. “Generalized Autoregressive Conditional Heteroscedasticity,” Journal of Econometrics 31, pp. 307-327.
- Caballero, Ricardo and Arvind Krishnamurthy, 2006. “Bubbles and Capital Flow Volatility: Causes and Risk Management,” Journal of Monetary Economics 53, Issue 1, pp. 35-53.
- Calvo, G., and E. Mendoza, 1996. Mexico’s Balance-of-payments Crisis: A Chronicle of Death Foretold.” Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 545.
- Engle, Robert, 1982. “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation,” Econometrica 50, Issue 4, pp. 987-1007.
- Grigorian, David and Vlad Manole, 2017. “Sovereign Risk and Deposit Dynamics: Evidence from Europe,” Applied Economics 49, Issue 29, pp. 2851-2860.
- Gonzalez-Rozada, Martin and Eduardo Levy Yeyati, 2008. “Global Factors and Emerging Market Spreads,” Economic Journal 118, Issue 533, pp. 1917-1936.
- Koepke, Robin, 2015. “What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature,” Institute of International Finance Working Paper.
- Lu, Yinqiu and Dmitry Yakovlev, 2018. “Instruments, Investor Base, and Recent Developments in the Malaysian Government Bond Market,” IMF Working Paper 18/95 (Washington: International Monetary Fund).
- Lu, Yinqiu, and Dmitry Yakovlev, 2017. “Exploring the Role of Foreign Investors in Russia's Local Currency Government Bond (OFZ) Market,” IMF Working Paper 17/28 (Washington: International Monetary Fund).
- Peiris, Shanaka Jayanath, 2010. “Foreign Participation in Emerging Markets’ Local Currency Bond Markets,” IMF Working Paper 10/88 (Washington: International Monetary Fund).
- Sienaert, Alex, 2012. “Foreign Investment in Local Currency Bonds Considerations for Emerging Market Public Debt Managers,” World Bank Policy Research Working Paper 6284 (Washington: The World Bank Group).
- Turner, Philip, 2012. “Weathering Financial Crisis: Domestic Bond Markets in EMEs,” Bank for International Settlements Paper 63.

### Appendix: Recent FX Market Measures in Malaysia
- Key dates:
  - December 2, 2016: FMC announced package to foster development of onshore FX markets.
  - December 5, 2016: Resident exporters measure effective.
  - December 14, 2017: BNM announced the special facility will be discontinued by year-end.
  - March 31, 2018: Outstanding balances in the facility can continue earning 3.1 percent interest up to this date.
  - April 2017 / May 2, 2017: Second series of initiatives announced by the FMC came into effect.
  - November 17 (year not specified in excerpt): BNM Governor announced further measures at an event.
- December 2016 FMC measures (high-level):
  - Institutional investors (resident and nonresident) can dynamically take onshore forward positions on a portfolio basis up to 25 percent of foreign currency or ringgit-denominated assets without documentary evidence, with a licensed onshore bank or an appointed overseas office. A one-time registration with BNM is required.
  - Residents can hedge foreign currency exposures and cancel hedging positions for US$/MYR and CNH/MYR currency pairs with a licensed onshore bank without documentary evidence up to an aggregate net open position limit of 6 million ringgits per licensed onshore bank. Participants must give a one-time declaration of hedging intent.
  - Resident exporters can retain up to 25 percent in foreign currency proceeds from their exports of goods; the balance should be converted into ringgit with a licensed onshore bank. Converted amounts could be deposited in a special facility earning 3.25 percent and available until end-2017. exporters can reconvert export proceeds to meet projected loans, imports, and other current account obligations for up to six months ahead. Previously, export proceeds were required to be repatriated within six months, but there was no conversion requirement.
  - Prudential limits on foreign currency (FC) investments by residents with domestic ringgit borrowing were extended to include FC investments onshore and apply to all residents (including previously exempted exporters) with ringgit borrowing for prudential reasons; those without domestic ringgit borrowing may continue to invest up to any amount.
  - Enhanced enforcement of regulations on banks’ non-involvement in offshore ringgit transactions: onshore banks engaging in ringgit foreign exchange transactions in the onshore market were required to obtain attestation from non-resident banks of non-participation in the non-deliverable forward (NDF) market. The requirement that onshore banks do not participate in or facilitate offshore ringgit derivative trading has been in place since 1998.
- April 2017 / May 2, 2017 FMC initiatives:
  - Registered investors can fully hedge and actively manage their exposures including unwinding of hedging positions—up to 100 percent (from 25 percent) of their underlying assets.
  - The aggregate net open position limit of 6 million ringgits per client per bank without documentary evidence was expanded to include GBP, EUR, and JPY (in addition to the US$ and CNH).
  - Principles for a Fair and Effective Financial Market were introduced, and a Code of Conduct for Malaysian Wholesale Financial Markets was issued.
  - Regulated short-selling framework was liberalized to allow all residents to participate in short-selling activities to improve liquidity in the conventional secondary government securities (MGS) market and facilitate hedging of interest rate risk.
  - Information reporting and settlement infrastructure was enhanced; RENTAS was enhanced via development of segregated securities accounts up to fund manager level to ease reporting burden on custodians and provide real-time information for surveillance purposes.
- Measures announced by BNM Governor (November 17 event):
  - Extending the short-selling framework to Malaysian government investment issues (MGII) by both conventional and Islamic banks to increase liquidity and boost trading activities for these Islamic securities and tighten pricing gaps and yield differences between MGS and MGII.
  - Expanding eligible collateral for liquidity operations with the BNM to include Bankers Acceptances (BAs) and Negotiable Instruments of Deposits (NIDs) issued by AAA-rated onshore licensed banks to enable banks to obtain liquidity under BNM’s Standing Facilities by pledging these money market instruments.
  - Introducing Bank Negara Interbank Bills (BNIBs) in ringgit and foreign currency, made available to onshore banks through auctions to manage ringgit and foreign currency liquidity and interest rate exposures and help provide competitive pricing on FX for all tenors.

*Source: wp1923 - References*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2019/wp1923.pdf_