Changes to Foreign Exchange Administration Policy
We have in our previous alert updated that Bank Negara Malaysia (BNM) released a new set of Foreign Exchange Notices which came into force on 30 April 2020. This new set of notices superseded the older notices.
In this alert, we set out the refinements effected by BNM under the new Foreign Exchange Notices to provide further flexibility to corporates and businesses to improve both business efficiency and foreign exchange risk management.
(1) Export proceeds of up to RM200,000 per transaction are now exempted from conversion
Resident exporters can now retain their export proceeds in foreign currency within their foreign currency trade account (Trade FCA), up to the equivalent of RM200,000 per transaction, without having to convert them into ringgit.
Export proceeds above RM200,000 per transaction remains subjected to the requirement to be converted into ringgit.
BNM has clarified that the RM200,000 threshold is based on export receipt rather than the invoice amount.
BNM also explained that this flexibility aims to lessen the administrative burdens of exporters, especially small & medium enterprises, to fulfill their foreign currency obligations. According to BNM, the Trade FCA of the exporters will be regularly monitored by onshore banks to ensure no abuse of this flexibility.
(2) Resident borrowers can now hedge foreign currency loan repayment up to the underlying tenure
Resident borrowers are now free to hedge their foreign currency loan obligations up to the underlying tenure. Previously, residents can hedge their foreign currency loan obligations up to 12 months only.
Examples of how resident borrowers may utilise this flexibility are as follows:
- If a resident borrower’s loan repayment is due in 24 months, the resident borrower may hedge up to 12 months and roll-over the forward contract later.
- If a resident borrower obtains a foreign currency loan from an onshore bank with a tenure of 3 years, the resident borrower can enter into a forward contract up to 3-year tenure to match with the loan contract.
BNM explained that this flexibility enables residents to better manage their foreign exchange risk arising from longer-term foreign currency loan exposure.
(3) Freedom to cancel or unwind hedged positions for any underlying transaction except hedges on “portfolio investments”
Residents and non-residents are now free to cancel or unwind their hedging positions involving ringgit except hedges on “portfolio investments”.
“Portfolio investments” consist of the following:
- Tradable debt securities; and
- Tradable equity securities (less than 10% of ownership in an investee company), including a collective investment scheme.
Previously, residents and non-residents need to seek BNM’s approval to unwind hedging positions while those registered under the Corporate Hedging Framework can unwind their positions in line with their underlying business needs. This flexibility now allows all entities to unwind their forward positions in managing their hedging costs except for “portfolio investments” in response to changing market conditions. Portfolio investors may register under the existing Dynamic Hedging Framework to utilise this flexibility.
Residents and non-residents may utilise this flexibility in the following manner:
- A resident or a non-resident may freely cancel or unwind a forward contract even if the underlying transaction, such as a foreign currency borrowing still exists (ie, not fully repaid). There is no restriction to cancel or unwind any forward contract involving ringgit where the underlying commitment still exist.
- There is no limit or threshold on the forward contract that a resident or a non-resident can cancel or unwind, but a resident or a non-resident shall not utilise such flexibility to speculate on the ringgit.
- A resident or non-resident may unwind an existing forward contract by entering into a forward contract without an underlying, provided that the licensed onshore bank or appointed overseas office is satisfied that the contract is entered to cancel any existing forex contract with an underlying.
- A resident or non-resident may unwind its forward position with a different bank, provided that the licensed onshore bank or appointed overseas office is satisfied that the forex contract is entered to cancel any existing forex contract with an underlying.
- A resident or non-resident institutional investor may cancel or unwind forward contracts entered to manage forex risks arising from portfolio investment, upon the resident or non-resident institutional investor registering with BNM under the Dynamic Hedging Framework.
(4) Residents are now free to obtain financial guarantees from non-residents
Residents can now freely obtain financial guarantees from any non-residents. This includes non-resident parent companies and any unrelated non-residents such as a non-resident financial institution.
Previously, residents can only obtain financial guarantees up to an aggregate limit of RM100 million. Any amount beyond that required BNM’s approval. This flexibility removes the limit and enables foreign investors to better support their entities that operate in Malaysia.
(5) Residents are now free to issue financial guarantees to non-residents (with some exceptions)
Residents can now freely issue financial guarantees on behalf or in favour of non-residents such as foreign subsidiaries, except for financial guarantees that are issued to secure any of the following:
- Foreign currency borrowing obtained by a non-resident special purpose vehicle (SPV) from a non-related non-resident entity. Provision of this financial guarantee will be subject to the foreign currency borrowing limit imposed on residents under the Foreign Exchange Notices.
- Foreign currency borrowing obtained by a non-resident where the borrowing will be repaid by a resident (other than when the financial guarantee is called upon under the event of default). Provision of this financial guarantee will be subject to the limit imposed on residents in respect of investments in foreign currency asset under the Foreign Exchange Notices.
BNM has also clarified that:
- Approval is still required for a resident guarantor to issue a financial guarantee to secure borrowing obtained by a non-resident special purpose vehicle (SPV), where the proceeds are used by another non-resident related entity. This is the case even if the resident guarantor is not the beneficiary of the borrowing.
- Approval is not required for any changes made to existing registered or approved financial guarantees, except for guarantees that were issued to secure foreign currency borrowing obtained by a non-resident SPV from non-related non-resident entity or where the repayment of the borrowing will be paid by a resident (other than when the financial guarantee is called upon under an event of default). In those cases, the resident guarantors need to abide by the conditions set in the approval letter.
- Other than the above, a resident guarantor is only required to submit an annual report on the status of the financial guarantees issued to or on behalf of non-resident to BNM’s Jabatan Pengurusan Data dan Statistik (JPS) of which the reporting requirements will be issued by BNM in due course.
Previously, residents can only issue financial guarantees up to an aggregate limit of RM50 million. This flexibility removes the limit with some exceptions as mentioned above, thereby enhancing the ability of Malaysian companies to support their overseas operations.
Other Measures
Other measures under the new Foreign Exchange Notices include the following:
- A resident entity is allowed to borrow in ringgit in any amount from a non-resident through the issuance of: (1) redeemable preference shares or Islamic redeemable preference shares in ringgit for use in Malaysia; and (2) ringgit corporate bond or sukuk, excluding non-tradable ringgit corporate bond or sukuk issued to a non-resident non-related entity or to a non-resident financial institution.
- A resident exporter of goods is allowed to extend the timeline for repatriation of export proceeds not exceeding RM200,000 equivalent per invoice to Malaysia, from 6 months up to 24 months from the date of shipment, if it has no control over the delay in receiving the export proceeds due to unexpected circumstances. The BNM has prescribed these circumstances to be the buyer’s financial difficulties, the buyer’s cancellation of order, restriction on foreign exchange transactions in the buyer’s country, quality/quantity claims, fraud, and the situation where the resident exporter provided credit terms of up to 24 months for consignment sale or for testing and commissioning of goods. In respect of export proceeds which exceed RM200,000 equivalent per invoice, the resident exporter shall repatriate such proceeds to Malaysia within 6 months from the shipment date.
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