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KUALA LUMPUR, April 13 (Reuters) - Malaysia's central bank said on Thursday it will allow all resident entities to short-sell Malaysian government securities from May 2, in an effort to boost liquidity in the bond market and provide additional risk management tools.
Only licensed banks and investment banks were allowed to short sell before.
Non-bank entities will also be allowed to have a net forward hedging position of up to 100 percent of their underlying assets and manage an additional 25 percent of foreign exchange exposure, said Bank Negara Malaysia (BNM) Assistant Governor Adnan Zaylani Mohamad Zahid.
The new initiatives are part of BNM's measures to improve liquidity and encourage more onshore trade of the ringgit . The ringgit hit a near 19-year low of 4.4980 to the dollar on Jan. 4, though it has since recovered 1.5 percent this year.
Adnan said the central bank is also considering a plan to allow short selling shariah-compliant Malaysian government investment issue (MGII) bonds to narrow the pricing gap with government securities.
"We will issue a concept paper and expect industry feedback by April 28," Adnan told journalists at a briefing on the new measures.
On foreign exchange risk exposure, Adnan said residents will be given additional options to hedge up to 6 million ringgit ($1.36 million) per bank without documentary evidence in the pound sterling, euro and Japanese yen starting May 2.
Residents are currently given two pairing options to hedge their foreign exchange risk exposure - dollar/ringgit and yuan/ringgit.
Adnan said BNM is also implementing a new code of conduct for financial markets, replacing the existing code issued in 1994 to update on the principles and standards to be followed by market participants and the role of industry associations "in preserving market order and stability".
In November, the central bank stepped in to discourage ringgit trade in the non-deliverable forwards (NDF) market, as the Malaysian currency languished as Asia's worst performer in the aftermath of Donald Trump's U.S. presidential election win.
BNM later announced in December new measures to boost liquidity and domestic trade of the ringgit, steps that the central bank said have helped stabilise the currency. ($1 = 4.4230 ringgit) (Reporting by Joseph Sipalan; Editing by Sam Holmes)