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By Niluksi Koswanage
KUALA LUMPUR, Feb 28 (Reuters) - Malaysia's central banktightened rules on the fixing of onshore rates for the ringgitcurrency on Thursday in a move aimed at improving the integrityof the rate-setting process that other regulators in SoutheastAsia are expected to follow soon.
Bank Negara's new rules are part of wider efforts tooverhaul the process of setting key currency rates after thescandal over the London interbank offered rate (Libor), and asevidence emerges that traders at Singapore banks were colludingto manipulate the foreign exchange market.
The move marks a shift away from a set of rates overseen bya banking association in Singapore that was found to have beensubject to attempts at manipulation. The set includes spotcurrency and interest rates for the Singapore dollar,Thai baht and Indonesian rupiah, ringgit,and Vietnamese dong.
Bank Negara said from March 1, the calculation to fix theringgit rate against the U.S dollar will have to be based onquotes with a bid and ask spread of not more than 10 pips. A pipis the smallest unit of a currency in dollar terms, equivalentto one-hundredth of a cent.
"The revised methodology for the fixing will ensure that therates used in the fixing calculation are tradable rates and thederived fixing rate appropriately reflects the market rates,'the central bank said in a statement.
Two sources with direct knowledge of the plan earlier toldReuters that Bank Negara asked the association to increase thenumber of banks contributing to the ringgit reference rates to15 from 11.
Underlying this is a move to promote Southeast Asiancountries' own onshore currency reference rates. Central banksin both Malaysia and Indonesia have already directed local banksunder their jurisdiction to use domestic reference rates insteadof the Singapore benchmarks.
They would like banks to price derivative contracts such asforeign exchange forwards against those reference rates, ratherthan using ones set in Singapore.
Bank Negara's plans are unlikely to have an impact oncurrency market flows, traders said. The Malaysian currency rosenearly 0.4 percent on the day to 3.0895 per dollar, breaching a200-day moving average at 3.0940.
The ringgit appreciated 3.5 percent against the U.S. dollarlast year as foreign investors flocked to Southeast Asianmarkets, but it has slipped more than 1 percent so far in 2013on growing political uncertainty ahead of general elections.
The Malaysian currency was the second most traded inSoutheast Asia after the Singapore dollar in 2010 although itaccounted for just 0.3 percent of total global foreign exchangemarket turnover daily, according to the Bank for InternationalSettlements (BIS).
"Malaysia and also Indonesia markets need to be deep enoughto generate high quality rates," said Professor Jin-Chuan Duan,director of the Risk Management Institute at the NationalUniversity of Singapore. "Or else, it becomes difficult toachieve."
TAKING AIM AT SINGAPORE'S FX MARKETS
Central banks in Southeast Asia had discussions in Februaryto look at ways to overhaul the reference rates. They weremainly targeting Singapore's foreign exchange market, the secondbiggest in Asia after Japan, that has frustrated their effortsto control their domestic currencies.
At the centre of these regulators' concerns arenon-deliverable currency forwards (NDFs), which allow hedging orspeculation on emerging market currencies that cannot bedirectly or freely traded due to exchange controls.
The contracts are settled in U.S. dollars, so there is noexchange of the underlying currency, although they reflectinvestor expectations on a currency's direction and can affectspot exchange rates.
The biggest banks in Asian NDF markets include UBS AG, JP Morgan Chase & Co and HSBC Holdings Plc.
"Whether it's Libor or the Singapore case or anywhere elsein the world, central banks need to test the prices, testtraders from these banks," said National University ofSingapore's Duan. "They need to see if these traders wouldstand by their bids and offers."
The Monetary Authority of Singapore said last year it wasworking with the Association of Banks in Singapore and theSingapore Foreign Exchange Market Committee to review the waythe NDF rates are set.
This came hot on the heels of U.S. and British regulatorscracking down on manipulation of Libor, which is used to setinterest rates for around $600 trillion worth of securities.
STABILITY
Malaysia has a reputation of moving quickly to defend theringgit. The country slapped on capital controls and pegged theringgit to 3.80 per dollar during the Asian financial crisis in1997 and 1998, blaming speculators including George Soros for a34 percent plunge in the currency then.
While Bank Negara removed the dollar peg in 2005, a ban onoffshore trading of the ringgit has remained in force ever sincethe crisis.
Analysts said any possible steps towards internationalising ringgit trade was out of the question with the Libor scandalsand the news of forex rate-rigging in Singapore. Strong inflowsinto Southeast Asia has also kept the Malaysian central bankcautious.
"The Malaysian central bank wants stability and is taking apre-emptive move," said Irvin Seah, an economist with DBS Bankin Singapore. "I don't think you will see negative reaction inthe financial markets as Bank Negara is trying to smooth out thefinancial imbalances."
