Malaysia plans to tighten rules on the daily setting of a key dollar-ringgit reference rate from tomorrow in an effort to boost transparency and shield the domestic market against manipulation.
Contributor banks will need to update the bid and ask prices continuously from 10:55 a.m. to 11 a.m. local time and the rates can be used for transactions among lenders and the central bank for a minimum offering of $5 million, according to a draft statement from the Financial Markets Association of Malaysia obtained by Bloomberg. The spread for the currency pair will be reduced to a maximum of 10 pips from 20, it said. A pip is the smallest unit of a currency’s price, which in U.S. dollar terms equals one-hundredth of a cent.
The rule changes come after the Monetary Authority of Singapore began a probe of the Association of Banks in Singapore in September to ascertain whether there was any manipulation of benchmarks including daily fixings that are used to settle non- deliverable forwards. Bank Negara Malaysia last month told lenders they must use a ringgit fixing set domestically to settle foreign-exchange contracts involving the currency, a person familiar with the matter said on Jan. 29.
“The rules may add a little bit of volatility to the ringgit in the near term, but anything that’s seen to improve transparency in the long term is a good thing for the market,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. (WBC) in Singapore, said in a telephone interview today. “The tighter ranges are probably designed to give more confidence in that fixing. I don’t think that’s going to have a huge impact on market sentiment either way though.”
The ringgit gained 0.3 percent to 3.092 per dollar as of 11:22 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency touched 3.0875, the strongest since Feb. 15. One-month implied volatility, a measure of expected moves in exchange rates used to price options, increased 15 basis points, or 0.15 percentage point, to 7.25 percent.
The Financial Markets Association of Malaysia hopes to increase the number of contributor banks for the exchange-rate fixing and is currently in talks with a few of them, according to the draft statement. Bank Negara “will continue to monitor” lenders’ submissions and probe any deviation from the new parameters,’’ according to the draft.
Singapore’s central bank asked lenders who are members of the rates-setting panel to review the process for non- deliverable currency contracts and to immediately report irregularities and take disciplinary action against any staff involved, it said in a statement in September. Banks including UBS AG and Royal Bank of Scotland Group Plc have suspended some traders in Singapore, where the central bank has expanded its investigation beyond money-market benchmarks.
Indonesia’s central bank told lenders to create an onshore reference rate to settle rupiah forward transactions domestically, Bank Indonesia Deputy Governor Halim Alamsyah said Feb. 6.
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