Despite the opening of domestic currency markets, most Asian regulators have continued to view non-deliverable forwards (NDFs) with concern. The regulatory backlash has become more apparent in recent months, with Bank Negara Malaysia having stepped up pressure on banks in Hong Kong and Singapore to stop trading NDFs since it scrapped the seven-year-old ringgit peg to the US dollar in July 2005, say dealers. And on October 27, China's State Administration of Foreign Exchange (Safe) sent out an order for Chinese banks to stop using offshore renminbi derivatives without its prior approval. Regulators in India, Indonesia, Korea, Malaysia, the Philippines and Taiwan are also known to dislike NDFs to different degrees.
Low volatility in the region's foreign exchange markets, which has reduced the need for hedging, and regulatory pressure have led to a big drop in NDF volumes this year. These contracts have posed a real dilemma for the regulators: how do they align the need for domestic currency liberalisation with unregulated offshore activity?
It is an equally tricky situation for banks, both local and international. How do they balance the interest of this lucrative offshore business against those of their domestic business for which relationship with the regulators is crucial? For obvious reasons, it is difficult getting dealers to talk openly about their NDF activity. As one head of treasury markets tells Asia Risk: "No one is going to formally tell you on the record that they do ringgit NDFs, that's for sure." We explore these issues in this month's cover story (see page 16).
In Europe, meanwhile, there's been a trend of institutional investors using capital-protected structured products as a strategic asset-allocation tool. This development is also gaining traction in Asia, although at a very slow pace. The fact remains that many, if not most, institutional investors in Asia are reluctant to invest in structured products due to restrictions set by their mandates, and unfamiliarity with derivatives. The benefits of structured products for portfolio managers were outlined in a report published by the Edhec Business School in Paris last year, and we discuss this in more depth in the story 'A slow climb'.
We also take a look at the copper futures market, which has been subject to extreme volatility in prices, caused by the involvement of China's Strategic Reserve Board as well as supply disruptions. Asia Risk talks to portfolio managers about where the market is heading and what investors are doing (see page 30).