Currencies: SGX-ICE ringgit futures to have limited impact on local currency

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 21, 2017 - August 27, 2017.

It is very hard for the new instrument to progress. The base currency of the contract is in ringgit and ringgit is non-tradeable and non-convertible outside of Malaysia. Even if the new instrument can really move the market, it still needs to [be adjusted] to the Bank Negara ringgit rate eventually. > Yong

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The introduction of ringgit futures by the Singapore Exchange (SGX) and the Intercontinental Exchange (ICE) is expected to have limited impact on the movement of the ringgit going forward.

A forex trader with a local bank says there will be very little demand for the newly introduced instrument after Bank Negara Malaysia slammed its introduction.

“Hedgers with genuine interest, such as importers and exporters, will not be trading offshore ringgit futures. There will be very little liquidity for the instrument. There will also be no arbitragers providing liquidity to the market,” he says.

Following the introduction of ringgit futures contracts at the SGX and ICE, Bank Negara issued a statement on Aug 9, saying the instrument goes against Malaysia’s foreign exchange administration policy (FEA) and urging all market participants to observe the existing FEA rules. It added that a contravention of the rules is an offence under the Financial Services Act 2013 and Islamic Financial Services Act 2013.

On his personal blog, Nurhisham Hussein, head of economics and capital markets of the Employees Provident Fund (EPF), said the impact would be minimal because there will be no real demand from genuine hedgers, such as importers and exporters, for the offshore ringgit futures contract. As such, the new instrument is unlikely to take off and have a huge impact on the onshore ringgit rate.

He points out that Bank Negara carries a big stick. “Essentially, anybody trading in this new instrument will be effectively blacklisted from onshore trading. This is much the same way they (the central bank) forced foreign investors off the NDF (non-deliverable forward) 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.”

According to Bloomberg, there are two types of ringgit futures listed on the SGX and Ice Futures Singapore. The latter is a Singapore-based exchange that offers different products such as energy, metals and cross-currency futures.

Nurhisham also pointed out on his personal blog that as long as the ringgit futures are traded only during local market hours, their impact on the onshore ringgit movements would be less damaging as “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”.

As at Aug 16, there was zero volume and 25 open interest on active month ringgit futures listed on SGX, according to Bloomberg, while the ringgit futures active contracts on the Ice Futures Singapore had zero volume and open interest.

Looking at these numbers, Yong Cheng Chook, founder and director of Straits Index Sdn Bhd and a professional trader, says it will be hard for the offshore ringgit futures to take off.

“It is very hard for the new instrument to progress. The base currency [of the contract] is in ringgit and ringgit is non-tradable and non-convertible outside of Malaysia. Even if the new instrument can really move the market, it still needs to [be adjusted] to the Bank Negara ringgit rate eventually,” he says.

A local forex trader says the local market hours should refer to the operating hours of local banks as only certain banks are able to provide ringgit trading services.

Based on Bloomberg, the main trading hours for ringgit futures contract listed on SGX are from 7am to 6pm, with electronic trading hours from 6.15pm to 4.45am. Trading hours for the ringgit futures contract listed on ICE Futures Singapore is from 8am to 6am.