EXCLUSIVE: Malaysia demands foreign banks commit to stop offshore ringgit trading - sources

By Saikat Chatterjee and Jongwoo Cheon

HONG KONG/SINGAPORE (Reuters) - Foreign banks have been asked to make a written commitment to Malaysia's central bank to stop trading the ringgit in the offshore non-deliverable forwards market in the bank's latest move to protect a weakening currency, banking sources said.

Foreign banks have been sent a form letter to sign, which asks them for an "unconditional representation and commitment" to stop trading in any offshore Malaysian ringgit non-deliverable forwards or offshore derivatives.

The letters were sent by banks in Malaysia who hold bonds and other Malaysian assets as custodians for foreign banks. The form letters are addressed to Bank Negara Malaysia.

Two separate sources at banks confirmed getting the form letter, which Reuters reviewed.

The letters also asks financial institutions to provide a detailed plan to the central bank if they need to make ringgit transactions onshore and to seek help from Malaysian financial institutions for any foreign exchange transaction needs.

Bank Negara in a statement to Reuters on Wednesday confirmed it has made the request through banks in Malaysia.

"Bank Negara Malaysia has requested through onshore banks that any non-resident banks, which transact in the forex market, to attest that they are not and will not engage in NDF related transactions," the Bank Negara statement said.Foreign holdings account for 40 percent of the total outstanding bond market in Malaysia, one of the largest foreign ownerships in Asia.

Foreigners have been fleeing the Malaysian market in a global bond rout following Donald Trump's election as U.S. President last week, which sent the dollar soaring and has hit emerging market currencies particularly hard.

Trump is expected to adopt policies that are likely to increase interest rates faster than previously thought.

Investors typically use the liquid NDF markets in Singapore and Hong Kong to exchange ringgit for dollars because of the many restrictions in the domestic market.

NON-INTERNATIONAL CURRENCY

The letters follow a Bank Negara statement on Saturday saying the central bank would "re-enforce" existing rules against offshore trading of the ringgit. The bank said the ringgit is a non-internationalised currency and thus trading it in the overseas NDF markets "is not recognised".

Malaysia's ringgit touched a 10-month low to $4.34 to the dollar at around 1100 GMT. But in the offshore NDF markets late last week, the ringgit dropped to a 12-year low.

The central bank's move is not surprising, given how much the ringgit has lost recently, said Nordea Markets' chief analyst Amy Yuan Zhuang in Singapore. "It sounds like a desperate intervention."

Bank Negara's comparatively small foreign exchange reserves has left Bank Negara with fewer options, she said. "It needs such measures more than other Asian central banks."

Malaysia's foreign reserves stood at $97.8 billion at the end of October.

The head of an emerging currencies trading desk at a Western bank in Hong Kong said it would be very difficult for Malaysia's central bank to crack down on NDF transactions because they have no oversight.

"Maybe, they'll have some success with onshore banks and their overseas trades but it would be difficult for them to check such trades at the big foreign banks offshore," he said.

Stephen Innes, a senior FX trader for broker OANDA in Singapore said the one-month spread for NDFs was still very wide. "It was almost untradeable."

“My feeling is that they are trying to effectively put on a capital control, as direct intervention will be difficult because of the fragile reserves situation," he said.

(Additional reporting by Praveen Menon. Editing by Bill Tarrant.)