Ringgit not impacted by futures trading abroad, says expert

This is despite concerns such trades will expose the currency to volatility and speculation


The ringgit futures contract trading on exchanges abroad has minimal impact to the local unit’s value, despite concerns such trades will expose the currency to volatility and speculation.

Singapore Exchange Ltd (SGX) rolled out the ringgit derivative contract last month. Bank Negara Malaysia (BNM) criticised the move, maintaining that the ringgit is a non-internationalised currency and any ringgit trading overseas is against Malaysia’s policy.

SGX has not responded to BNM’s criticism. The ringgit, which was among the worst-performing currencies against the US dollar last year, had recovered and strengthened 4.2% year-to-date after hitting a 52-week low of 4.5, according to Bloomberg data.

An industry expert said the low trading volume for ringgit futures contract in Singapore presently has caused little worry over the impact on the ringgit.

“It seems like nothing has happened there. There is not much impact at the moment. With futures trading, market makers need to put up prices in order for volume to start moving. Exchanges normally try to attract market makers, but (for) this particular contract it seems like nothing is happening,” the analyst told The Malaysian Reserve.

The ringgit derivative contract, launched on the city-state bourse last month, has attracted minimal interest thus far.

As per SGX’s July Market Statistics Report, a total of 172 ringgit futures contracts were traded on SGX during the month, while the yen saw 2,202 futures contracts traded and the Korean won, 4,536 futures contracts. The analyst said movement of the ringgit futures contract is closely linked to the currency’s actual performance.

“The underlining is the most important. The level of the ringgit against the US dollar has been quite static for some time,” he said.

The introduction of ringgit futures contract trading on SGX and the Intercontinental Exchange or ICE Futures Singapore is “inconsistent with Malaysia’s foreign-exchange administration policy and rules”, BNM had recently noted.

BNM governor Datuk Seri Muhammad Ibrahim last Friday said the central bank’s position is limited to Malaysians seeking to trade in the contract.

In November last year, the central bank insisted that local and foreign banks cease trading the ringgit on the non-deliverable forward (NDF) mar- ket offshore, as it viewed the majority of such trades as speculative and influencing the value of the ringgit’s exchange value — especially against the US dollar.

The currency expert said corporations and institutions use futures for hedging to manage their currency exposure risk.

“The futures contract can be misused for speculation. So, there are two sides to the issue,” he said.

“It’s possible that SGX saw the demand and introduced the contract, but perhaps the market has not responded to the product,” the expert said.

Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said: “It also depends on how liquid is the market. The liquidity will determine the price discovery mechanism, which is the function of the number of market participants and transactions.

“If so, there is high chance that it may have some influence to the cash market just like the NDF market,” he added.