MANILA, Philippines - Southeast Asian economies including the Philippines should re-evaluate current measures to make foreign exchange (FX) markets more accessible to investors, the Asian Development Bank said in a report.
The ADB, in its Facilitating Foreign Exchange Risk Management for Bond Investment in Asean+3 report, made the recommendation especially for regulators in South Korea, Indonesia, Malaysia, the Philippines, and Thailand, where markets are neither very liquid nor undeveloped.
“Consider measures that would make it easier for foreign investors to transact in the FX and FX hedging markets. Consider reviewing the real demand principle regulations associated with capital controls,” the bank said.
“The aim would be to reduce, as much as reasonable, barriers that separate the NDF (non-deliverable forward)/offshore market from the onshore market in a measure and suitably sequenced program, with the emphasis on making access easier for bona fide investors while simultaneously continuing to protect the currency from substantial short-term speculation,” it said.
In particular, the bank said regulators in the five economies should take into consideration tweaking rules on cash balances, overdrafts, and borrowings; measures covering bond investors hedging onshore; and restrictions on domestic banks that limit their participation in offshore FX and FX hedging markets.
There should also be an evaluation of the flow of information to ensure that investors have timely information on market activity, the report said.
The report industrial there should always be enough dollars for bond investors when they exit the markets and that offshore FX contracts should be allowed to be deliverable onshore.
The bank further said there should also be a move to lower costs for execution, compliance, and documentation.
At the same time, the report has urged the five economies to make onshore FX derivatives markets more liquid and integrated with offshore FX markets.
“Consider reviewing the domestic legal framework that affects derivatives in bankruptcy. An important aim would be to ensure suitable treatment of closeout netting and collateral in bankruptcy,” the ADB said.
This move may allow banks to lessen the capital they need to raise for derivatives and repos, increase domestic liquidity of derivatives and repos, reduce systemic risks, and even develop infrastructure funding, it said.
“This will generally be a lengthy process but, when completed, a key component of the financial market infrastructure will be in place. It would also remove an important impediment to offshore investors hedging onshore,” the report said.