Malaysia’s central bank tightened rules on the fixing of onshore rates for the ringgit currency on Thursday in a move aimed at improving the integrity of the rate-setting process that other regulators in Southeast Asia are expected to follow soon.
Bank Negara’s new rules are part of wider efforts to overhaul the process of setting key currency rates after the scandal over the London interbank offered rate (Libor), and as evidence emerges that traders at Singapore banks were colluding to manipulate the foreign exchange market.
The move marks a shift away from a set of rates overseen by a banking association in Singapore that was found to have been subject to attempts at manipulation. The set includes spot currency and interest rates for the Singapore dollar, Thai baht and Indonesian rupiah, ringgit, and Vietnamese dong.
Bank Negara said from March 1, the calculation to fix the ringgit rate against the US dollar will have to be based on quotes with a bid and ask spread of not more than 10 pips. A pip is the smallest unit of a currency in dollar terms, equivalent to one-hundredth of a cent.
"The revised methodology for the fixing will ensure that the rates used in the fixing calculation are tradable rates and the derived fixing rate appropriately reflects the market rates," the central bank said in a statement.
Two sources with direct knowledge of the plan earlier told Reuters that Bank Negara asked the association to increase the number of banks contributing to the ringgit reference rates to 15 from 11.
Underlying this is a move to promote Southeast Asian countries’ own onshore currency reference rates.
Central banks in both Malaysia and Indonesia have already directed local banks under their jurisdiction to use domestic reference rates instead of the Singapore benchmarks.
They would like banks to price derivative contracts such as foreign exchange forwards against those reference rates, rather than using ones set in Singapore.
Bank Negara’s plans are unlikely to have an impact on currency market flows, traders said. The Malaysian currency rose nearly 0.4 per cent on the day to 3.0895 per dollar, breaching a 200-day moving average at 3.0940.
The ringgit appreciated 3.5 per cent against the US dollar last year as foreign investors flocked to Southeast Asian markets, but it has slipped more than 1 per cent so far in 2013 on growing political uncertainty ahead of general elections.
The Malaysian currency was the second most traded in Southeast Asia after the Singapore dollar in 2010 although it accounted for just 0.3 per cent of total global foreign exchange market turnover daily, according to the Bank for International Settlements.
"Malaysia and also Indonesia markets need to be deep enough to generate high quality rates," said Professor Jin-Chuan Duan, director of the Risk Management Institute at the National University of Singapore. "Or else, it becomes difficult to achieve."-- Reuters