THE Malaysian central bank has announced a new mechanism that determines the ringgit’s value based on volume traded.

The new mechanism to determine the ringgit’s value based on volume traded would minimise the chances of collusion among banks to fix the Malaysian currency at a rate that does not reflect its fundamentals.

It will also enhance the integrity of the rate-setting process.

According to several foreign-exchange (forex) strategists, the new mechanism that will take effect on July 18 this year and is also expected to reduce volatility of the currency, while making it more market-driven.

“The new mechanism introduced by Bank Negara will allow more transparency,” Singapore-based head of forex research at Malayan Banking Bhd Saktiandi Supaat said.

“Importantly, it will reduce the chances of collusion among banks or advantages that certain parties have in determining the price of the ringgit,” he told StarBiz.

Sharing the same sentiment, Nizam Idris, the head of forex and fixed-income strategy at Macquarie Bank in Singapore, said 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.

According to Nizam, the outbreak of the Libor-fixing scandal, and then the forex-rigging scandal, was a wake-up call indicating that some banks might submit rates to influence an outcome in their favour.

“So, I think it is a positive move. The whole idea is to bring the ringgit exchange rate closer to being market-driven,” he said of the new methodology for the US dollar/ringgit spot fixing announced by central bank Bank Negara.

The central bank on last Wednesday had said a new methodology for the dollar/ringgit spot fixing taking effect from July 18 would be based on market transaction data rather than submission of quotations by selected banks as it is under the existing system.

Concurrently, Bank Negara said, the official closing hour for the onshore ringgit market would also be extended from 5pm to 6pm effective on the same day next month to give businesses additional time to complete their forex transactions.

Under the new mechanism, the ringgit will be computed based on the weighted average volume of the interbank dollar/ringgit forex spot rate transacted by domestic financial institutions between 8am and 3pm, and the exchange rate would be published at 3:30pm daily.

This is opposed to the existing system, whereby the exchange rate between the ringgit and the dollar is fixed based on quotations by selected domestic banks, and is published at about 11am.

According to Bank Negara, the new methodology is more transparent and will better reflect underlying trades during the day. The market transaction data is sourced from online reporting by domestic financial institutions to the central bank.

“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.

“I believe that upon the implementation of the new mechanism, Bank Negara would continue to fine-tune the system to take into account even more factors that determine the fundamentals of the ringgit,” he added.

The Star/ANN

Published in Dawn, Business & Finance weekly, June 20th, 2016