We shall review this policy from time to time, with a view to further liberalise the rules. 3. The Financial Market Committee (FMC), through an industry-driven effort, is in the final stages of rolling out an operational framework for Foreign Exchange Administration (FEA) compliance. This will be an industry standard that sets the minimum due diligence and list of documents required for FEA. Further to this, a standard summary of the relevant FEA rules to facilitate common understanding and consistent interpretation among market participants is being formulated. It is expected, through this important initiative, there would be better clarity and greater efficiency for the financial institutions and their customers, in undertaking FX and hedging transactions. Taken together, these three measures are targeted at residents such as the Small and Medium Enterprises with a view to expand their access to hedge freely and directly with onshore banks. This flexibility will provide the avenue for simplified processes and flexible hedging activities within prudential limits and incentivise residents to use onshore banks for their hedging needs. These are but first steps. We will be looking at further measures, similar to these. The idea behind these measures is to make our onshore financial market more flexible, facilitative and competitive. In other words, we are deepening the onshore markets towards becoming the main actor to conduct the foreign exchange needs of our economy. This journey will be exciting and require some behavioural changes. But we have no doubt that with the full support of the industry, we can achieve these outcomes.

The sum effect of these behaviours is that we inadvertently imported the NDF volatility into the onshore market. Given the importance of this, let me dwell a little further on the dynamics of the situation. The offshore market, which is driven by speculative interest, lacks the onshore market’s diverse spectrum of market participants and information. This was notably mentioned by the Federal Reserve Bank of New York paper in May 2005, that an estimated 60 to 80 percent of NDF volume is generated by speculative interest. Because of this, NDF tends to promote herd behavior which compounds the lack of two-way market liquidity. Prices may move rapidly in one direction or another driven purely by fickle sentiment, as well as leveraged positions taken on by the speculators, making them inherently unsuitable to represent an efficient and objective price discovery process for the ringgit. Compounding this further, the offshore NDF markets are highly opaque and information on these markets can only be gleaned through the BIS’ triennial survey and other sources such as through mandatory reporting of derivatives and swap data repositories on US financial institutions. Actions by BNM/the market With increasing concern over the offshore market negative spill-over impacts, BNM has taken a broad spectrum of actions to reduce the speculative and damaging influence of NDF activities. Because of the estimated volume and its opaqueness, the NDF market clearly has the potential to undermine the integrity and financial stability of the onshore market.