It will allow more transparency and enhance the integrity of the rate-setting process. Analysts view it as a positive move.
BNM said on Wednesday that the new methodology for the US dollar/ringgit spot fixing would take effect on July 18. A trial run will begin on June 20.
BNM will require domestic contributing banks to provide a quote for the exchange rate based on market transaction prices under the new system, rather than the current method where quotes can be given that aren’t based on actual trades, the central bank said in a statement on Wednesday.
Bloomberg reported that BNM would also expand the official close of trading for the dollar-ringgit to 6pm from 5pm, although onshore banks can continue to make contracts. The currency doesn’t trade offshore unlike non-deliverable forwards.
The new reference rate will be published daily at 3.30pm local time and will be computed based on the weighted average volume of the interbank exchange rate transacted by domestic financial institutions between 8am and 3pm, BNM said.
The ringgit gained 0.2 per cent to 4.0990 against the dollar in Kuala Lumpur Wednesday, according to prices from local banks compiled by Bloomberg. It slumped 4.9 per cent this quarter in Asia’s worst performance.
Meanwhile, the Star reported that the new mechanism would minimise the chances of collusion among banks to fix the Malaysian currency at a rate that does not reflect its fundamentals.
“The new mechanism introduced by Bank Negara will allow more transparency,” the Star quoted Singapore-based head of forex research at Malayan Banking Bhd Saktiandi Supaat as saying.
“Importantly, it will reduce the chances of collusion among banks or advantages that certain parties have in determining the price of the ringgit.”
Nizam Idris, the head of forex and fixed-income strategy at Macquarie Bank in Singapore, was quoted as saying minimising the chances of collusion among banks was especially relevant in the wake of a series of price-manipulation scandals involving banks, such as the 2012 case of interest-rate rigging by financial institutions that set Libor, or the London Interbank Offered Rate, and the 2015 reports on forex rate-rigging involving, among others, the US dollar and the euro, by several global banks.
“Having a trade-weighted exchange rate formula makes sense, as it reflects the underlying demand and supply of the currency,” Nizam said, noting that Bank Indonesia had also recently introduced a new mechanism to make the rupiah more reflective of market forces.
On concerns that the new mechanism for the ringgit would fail to reflect the offshore market sentiment towards the Malaysian currency, Nizam said: “The volume in the onshore market is always much bigger than that in the offshore market, so I don’t see a big issue here.”