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* Bank Negara directive would exclude use of Singapore ringgit reference rate
* Traders say no reason given, move follows news of probes by Singapore banks
* Traders see no effect on ringgit market, may impact offshore-onshore arbitrage
By Vidya Ranganathan
SINGAPORE, Jan 29 (Reuters) - Malaysia’s central bank said it has told domestic banks they must use a reference rate produced by the country’s foreign exchange association for ringgit foreign exchange contracts.
The central bank’s directive would exclude use of a Singapore-based fixing now used by many traders in the market - and which a source with knowledge of bank probes in the city state said was found to have been subject to attempts at manipulation.
The directive was sent to heads of banks in Malaysia and dated Friday. Traders in Kuala Lumpur said the central bank had provided no reason for the ruling.
Traders, speaking on condition they not be named, said onshore banks had been told to use the spot ringgit rate derived each day from contributions onshore. That rate is managed by the Association Cambiste Internationale (ACI) and is an average of contributions from 12 banks.
Many of them had been using the reference rate provided by the Association of Banks in Singapore. The ABS’s set of rates includes spot currency rates and interest rates for the ringgit, Singapore dollar, Thai baht and Indonesian rupiah.
Thomson Reuters, parent company of Reuters News, calculates and distributes the spot reference rates for both panels of banks.
The ABS declined comment.
Traders in the ringgit market said the new rule had not unnerved markets but could have some impact on banks that run huge arbitrage positions playing on the divergence between domestic and offshore rates.
“Please be informed that a licensed onshore bank is required to ensure that the Malaysian USDMYR fixing is used as reference for the pricing of foreign exchange contracts involving ringgit. No other fixing shall be used as reference,” Bank Negara Malaysia’s note to banks said. A copy of the circular was seen by Reuters.
The reference rates, or fixings, are used by banks to settle maturing onshore forward contracts and offshore non-deliverable forwards (NDFs).
Singapore’s central bank, the Monetary Authority of Singapore, ordered banks that help set local interbank lending rates and NDF rates to review the fixing process last year as U.S. and British regulators cracked down on manipulation of the London interbank offered rate (Libor), a benchmark used to set interest rates for around $600 trillion worth of securities.
The MAS gave no comment when contacted by Reuters regarding the move by Malaysia’s central bank.
A source with knowledge of the inquiries told Reuters that the internal reviews by banks in Singapore had found evidence that traders colluded to manipulate rates in the NDF market.
The source did not make specific comments about possible wrongdoing by individual banks or traders and Reuters has no independent evidence of such wrongdoing.
Regardless of the probes’ findings, the Malaysian market may lack the liquidity to offer a better alternative to the Singapore rates, said Professor Jin-Chuan Duan, director of the Risk Management Institute at the National University of Singapore.
“If this is to get a more accurate rate, I don’t think Malaysia can just replace the Singapore rate,” Duan said.
“Even if they can ensure their benchmark can’t be manipulated, the next question is whether the Malaysian market is deep enough to set an honest rate. I think Malaysia can’t replace Singapore in that regard,” he said. (Additional reporting by Rachel Armstrong in Singapore and Niluksi Koswanage in Kuala Lumpur; Editing by Edmund Klamann)