This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 21 - 17, 2016.

Bank Negara Malaysia and Bank of Thailand announced the commencement of a local currency settlement framework that will grant partner banks the necessary flexibility to provide a greater range of financial services. These include ringgit and baht deposits, trade financing and hedging products. 

According to Bank Negara’s statement, the framework, which is pursuant to the memorandum of understanding signed between the two central banks in August 2015, marks a milestone in strengthening financial cooperation between the two central banks.

With the introduction of the framework, Malaysian and Thai businesses will effectively be able to source ringgit and baht from the respective banks in their home country to settle trade transactions, thus allowing greater efficiency in accessing local currencies and managing the exchange rate risk arising from the transactions.

Both central banks have appointed banks that fulfil key qualifications, including strong business links between both countries, presence of branches in both countries and higher volume of trade in ringgit and baht to support the functioning of the framework. The appointed banks in Malaysia are Bangkok Bank Bhd, CIMB Bank Bhd and Malayan Banking Bhd (Maybank), while the appointed banks in Thailand include Bangkok Bank pcl, CIMB Thai Bank pcl and Kasikornbank pcl.

With the framework in place, businesses in Thailand will now be able to engage in financing and deposit transactions in ringgit with the appointed banks. While businesses in Malaysia have been able to obtain baht-denominated financial services from any bank in the country, they can now benefit from more cost-efficient trade settlement transactions, including hedging and financing facilities with the appointed banks. 

The appointed banks are required to provide direct baht and ringgit quotes for the buying and selling of the currency pair and provide trade financing and hedging facilities in the respective currency. The banks are also required to provide daily baht and ringgit quotes on Reuters and Bloomberg.

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