Bank Negara Malaysia’s (BNM) December 2016 decision to ban offshore non-deliverable forward trading in ringgits was part of a broader package of moves aimed at relieving pressure on the currency that had dropped to a 10-month low against the greenback.
In addition to the offshore crackdown, onshore ringgit derivatives transactions were limited to six months in duration, while asset owners were hit by changes to the rules relating to the cap on onshore foreign currency product investment. These calculations were altered to include overseas investments, as well, meaning not just the duration but also volume of foreign exchange derivatives transactions fell in the onshore market in 2017.
The impact of this package of measures on the domestic global market business was seismic, and represented the biggest change since BNM ended the ringgit’s dollar peg in 2005, says Alvin Kong, head of global markets for HSBC Malaysia.
“It’s the biggest change since the depeg. All the measures combined to mean the entire global markets business was set back in terms of the tenor and the ability for customers to hedge their onshore investments – this was especially difficult for the foreign investors,” he tells Risk.net.
“Our risk management solutions business has seen good growth for many years, delivering various innovative products and ideas to help our customers manage their forex, rates and credit risks.”
While it is a global bank, the lender’s Malaysian arm is a wholly owned subsidiary, not branch, of the parent group, and has been incorporated locally since 1994. Since that time, it has played a key role in developing the local derivatives market.
“HSBC Malaysia did the first dollar/ringgit cross currency swap back in 2004, when the ringgit was still pegged, and then we started a currency options book a month after the currency was depegged in 2005,” says Kong.
And in the 18 months since the central bank shook up the ringgit forex market, HSBC Malaysia has played a fundamental role in developing the onshore currency trading – something that has been recognised by the central bank itself.
In the 18 months since the central bank shook up the ringgit forex market, HSBC Malaysia has played a fundamental role in developing the onshore currency trading – something that has been recognised by the central bank itself
In November 2017, Financial Markets Association Malaysia (FMAM) issued a set of three awards, using BNM data, to the firms judged to have contributed most to the development of the onshore forex markets since the 2016 rule changes came in.
These awards were: most active forex bank; most active ringgit forex bank; and most active bank for non-resident hedging. And while Maybank won the first, HSBC scooped the other two – a remarkable feat for an institution with non-local roots.
HSBC has a massive custodian business in Malaysia, and one rival firm suggests this was an unfair advantage that distorted its award performance, given that they were allocated on market share statistics. Kong rejects this, and instead puts the bank’s success in 2017 down to hard work.
“The data used for the FMAM awards was based on actual forex volume done by the banks. Offshore investors are free to choose any banks they wish to go to for forex business, and are not limited to their custodian bank – and hedging is a conscious decision, unlike forex transactions linked to securities settlement,” he says.
The global markets team has carried out road shows around the world to promote dynamic hedging and educating overseas sales and clients on the regulatory framework and reasons for hedging. It is because of these efforts the bank gained a real ringgit forex market share from investors, he says.
The bank’s own analysis reveals it gained market share and volumes over the past two years, especially after the introduction of the central bank’s measures, says Kong.
HSBC Malaysia has not just been developing its onshore forex franchise over the last 12 months, it has set up a dedicated Japan desk in its global market division, which is looking to create business opportunities with Japanese firms investing in Malaysia.
The bank has also been developing innovative Islamic structuring solutions in conjunction with HSBC Amanah Malaysia, such as the $49 million collateralised commodity murabaha transaction with an Emirati bank.
Murabaha refers to a sharia-compliant type of structured finance, and this transaction was one of this kind for HSBC to use across the whole of its Asia-Pacific business. It was developed to help a United Arab Emirates lender meet its Basel III net stable funding ratio liquidity requirement, and Kong says that not only is it an internal first for the bank, but one that offers a potentially rich future income stream.
“The collateralised commodity murabaha transaction is the first such deal that we have completed in conjunction with HSBC Amanah, but it opens up the door to many more, and we have now have quite a large pipeline of deals,” he tells Risk.net.