TUTORIAL 5

Topic 7 – The Foreign Exchange Market

1. In Malaysia, to become a FOREX dealer, a candidate must obtain a professional

certification from Persatuan Pasaran Kewangan Malaysia (“PPKM”) as a requirement
for licensed financial institutions and money broking firms. Justify THREE (3)
objectives of the financial institutions imposing such requirements.

i) The certification aims to make sure that people working in Malaysia's financial
markets are skilled and professional. It shows that someone has the right abilities to
work as a Forex dealer in the country.

(ii) Additionally, having this certificate can lower risks. Skilled practitioners can handle
the risks of Forex trading better. This helps decrease the chances of fraud and bad
behavior. As a result, it reduces the likelihood of big financial losses for both financial
institutions and their customers.

(iii) The certificate also encourages following regulations. Those who get certified
likely learn about the rules and guidelines for Forex trading in Malaysia. When
practitioners have to be certified, it helps regulatory authorities make sure everyone
follows the necessary rules.

(iv) Lastly, having certified and well-regulated professionals helps the industry grow in
an organized way. When the financial industry is known for being trustworthy and
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 following rules, it builds a good reputation at home and abroad. This reputation attracts
investments from other countries, encourages partnerships across borders, and helps the
industry expand.
https://docplayer.net/78142048-Pasaran-kewangan-malaysia-certificate.html

2. The MPC of BNM sets monetary policy by changing the Overnight Policy Rate
(OPR) by lowering it down or increase the rate. Discuss how this monetary policy has
its impact to the Ringgit exchange rate.

When the Overnight Policy Rate (OPR) goes up, it means that banks increase their
interest rates. This makes it more expensive for people to borrow money and spend.
When people spend less, there is less demand for goods and services. This helps keep
prices from rising too quickly, which is good for controlling inflation.

On the other hand, a high interest rate can attract foreign investors who want to invest
in our local markets. This increases the demand for our currency, the Ringgit, which
makes it stronger. In the long run, a high OPR helps the economy grow steadily and
keeps inflation under control.

In summary, raising the OPR creates the right conditions for steady economic growth
while keeping prices stable. This makes investors feel more confident in our economy
and supports the value of the Ringgit over time.

Conversely, when the OPR is low, it means that borrowing money becomes cheaper.
This encourages people to borrow more and spend more. While a low OPR can help
stimulate economic growth in the short term, it might not be good for the Ringgit in the
long term. When interest rates are low, investors may prefer to invest in other countries
where they can get higher returns. This lowers the demand for the Ringgit and can
cause its value to drop.

3. Explain the legality of undertaking foreign currency trading in Malaysia under the
Exchange Control Act 1953 and Bank Negara Malaysia (BNM).
Khoo Yoke Ching Group – Xin Yu

The public is hereby notified by Bank Negara Malaysia that, in accordance with the
Exchange Control Act of 1953, only licensed commercial banks, Islamic banks,
investment banks, and international Islamic banks, as well as licensed money services
business providers or money changers, are permitted to buy and sell foreign currency
in Malaysia.

Bank Negara Malaysia's website has a list of approved dealers and financial
institutions that are allowed to purchase or sell foreign currency by the Controller of
Foreign Exchange.

Furthermore, financial products that adhere to Shariah, such as those pertaining to

foreign exchange, that are provided and handled by licensed Islamic financial
institutions have been approved by their respective Shariah Committees with support
from Bank Negara Malaysia's Shariah Advisory Council.

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 Source : Foreign Currency Trading - Bank Negara Malaysia (bnm.gov.my)

In Malaysia, there's a law called the Exchange Control Act 1953 (ECA).
According to this law, it's against the rules for anyone to buy or sell foreign currency unless
they're dealing with an authorized dealer, like a licensed bank. This means individuals or
companies can't just exchange foreign currency with anyone they want.
The Bank Negara Malaysia (BNM) has explained that you can only legally buy
and sell foreign currency in Malaysia through licensed banks or money changers approved
by the government. So, if you want to do forex trading in Malaysia, you have to follow
these rules set by the government and other regulatory bodies.

4. Pursuant to the Financial Services Act 2013 and Islamic Financial Services Act 2013,
specify the penalty imposed by BNM on offenders of illegal foreign currency trading?
Zoe Por Group - Wong Sai Hou

We should note that BNM is the body tasked with enforcing the Financial Services
Act 2013 (Act 758) which states that: -
 Section 8(1)(b) – no person shall carry on any authorized business unless it
is – approved by the Bank under section 11 to carry on any of the businesses
set out in Division 1 of Part 1 of Schedule 1.
 Section 8(3) – any person who contravenes subsection (1) commits an
offence and shall, on conviction, be liable to imprisonment for a term not
exceeding ten years or to a fine not exceeding fifty million ringgit or to
both.

Illegal Foreign Exchange Trading Scheme refers to the buying or selling of

foreign currency by an individual or company in Malaysia with any person who
is not a licensed onshore bank or any person who has not obtained the approval
of Bank Negara Malaysia under the Financial Services Act 2013 or Islamic
Financial Services Act 2013.

If there is an illegal foreign currency trading, on conviction, be liable to a fine

not exceeding RM 50 million or to imprisonment for a term not exceeding ten
(10) years or to both.

If someone is caught doing illegal foreign currency trading, they could be fined up to
RM50 million or face a maximum of ten (10) years in prison, or both, upon conviction.

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 5. The Foreign Exchange Administration (FEA) rules are a set of rules that are
administered by Bank Negara Malaysia (“BNM”) under the Financial Services Act
2013 and Islamic Financial Services Act 2013. Answer below questions in accordance
with the FEA and support your answer with reason. X no one earn credit

(i) State the objective of the implementation of FEA and to who does this FEA
apply to.

(ii) A resident with domestic ringgit borrowing is free to invest up to RM1 million
equivalent in aggregate per calendar year on individual basis ONLY. But in
the case if a resident wants to invest more than RM1 million, determine
whether he/she is allowed to do so. State your reason.

(iii) Does an individual resident need approval to open a foreign currency account?

(iv) Can a resident individual hedge his investment in foreign currency assets in
Malaysia offered by residents?

(v) How much ringgit can a resident individual convert to credit into a foreign
currency account for education/employment overseas?

(i) The objective of implementing the Foreign Exchange Administration (FEA) is to make the
system more efficient and provide more flexibility in managing foreign exchange transactions. It
applies to residents who deal with foreign currencies and non-residents who deal with Malaysian
Ringgit while in Malaysia.

(ii) A resident with domestic ringgit borrowing can invest up to RM1 million equivalent in total per
calendar year on an individual basis only. However, if a resident wants to invest more than RM1
million, they can do so with approval from a financial institution and Bank Negara Malaysia
(BNM), along with the required documentation.

(iii) No, an individual resident doesn't need approval to open a foreign currency account. They are
free to open foreign currency accounts either in Malaysia or overseas. However, placing funds in
onshore or offshore foreign currency accounts is subject to the prevailing rules on investing abroad.

(iv) Yes, a resident individual can hedge their investment in foreign currency assets in Malaysia

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offered by residents, but it must be done through a licensed onshore bank. However, a licensed
international Islamic bank cannot engage in currency transactions involving the Malaysian Ringgit.

(v) A resident individual can convert any amount of ringgit into foreign currency for crediting into
a foreign currency account for education or employment overseas, as long as they provide relevant
documentary proof.
6. “On 1 September 1998, the Government of Malaysia announced new exchange
control measures to curb the internationalisation of the ringgit and to regain
monetary policy independence”. – Bank Negara Malaysia Zhen Hao group-jia ying

(i) Explain THREE (3) reasons why the government has its exchange control policy
to be imposed in domestic financial markets.

Economic Stability and Crisis Management

The announcement of exchange control measures in 1998 by the
Malaysian government was a response to the Asian financial crisis that
affected several Southeast Asian countries. By imposing controls on
the internationalization of the ringgit, Malaysia aimed to stabilize its
economy and shield itself from the volatility in global financial markets.
This move was part of a broader strategy to manage the crisis and
regain control over monetary policy to address economic challenges.
Protecting the Ringgit's Value
Malaysia sought to protect the value of its currency, the ringgit, by
restricting its convertibility and controlling its movement in international
markets. By limiting the internationalization of the ringgit, the
government aimed to prevent speculative attacks on its currency and
maintain a more stable exchange rate. This was crucial for ensuring
price stability, promoting investor confidence, and supporting economic
recovery after the financial crisis.
Regaining Monetary Policy Independence
Exchange control measures were implemented to regain autonomy
over Malaysia's monetary policy. During times of economic uncertainty,
countries may find it necessary to impose controls to prevent excessive
speculation and capital flight, which can compromise monetary policy
objectives. By curbing the internationalization of the ringgit, Malaysia
aimed to reestablish control over its monetary policy tools and
implement measures that would align with its economic priorities.
Exchange controls aim to limit the buying and selling of a nation's currency or to
safeguard foreign currency reserves for various reasons:

(a) To prevent excessive capital outflow, control policies are put in place to
regulate domestic financial markets and curb sharp fluctuations in currency values.
Unrestricted outflows of funds can lead to currency depreciation and instability,
posing risks to the overall economic stability.

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 (b) Promoting a stable local currency involves restricting the movement of funds
abroad, limiting options for foreign investments. This measure helps protect the
domestic currency from speculative attacks, maintaining its value relative to other
currencies. A stable local currency fosters price stability, reducing the risk of
inflation for imported goods and services and creating a conducive environment for
economic growth.

(c) Exchange controls aid in preventing tax evasion and money laundering by
monitoring funds transferred overseas for investments. Such funds may be linked
to illegal activities like money laundering or tax evasion, where individuals or
companies attempt to conceal the illicit origins of money to evade detection by law
enforcement and financial institutions. This helps prevent tax evasion, ensuring
government tax revenues are not diminished.

(d) Exchange controls contribute to the protection and development of local

financial markets. Governments implement these policies to shield domestic
industries from foreign competition. By restricting investment abroad, capital is
encouraged to remain within the country, fostering the growth of local financial
markets. This encourages investors to seek opportunities domestically, leading to
the expansion and development of domestic financial instruments and markets.
(ii) Discuss TWO (2) points on how the limitations on funds flowing abroad by
Malaysia government’s policy have contributed to the development of the
Dollar-Ringgit markets.

Development of Onshore Financial Markets

The limitations on funds flowing abroad prompted investors to focus
more on onshore financial markets, including the development of the
Dollar-Ringgit markets. As restrictions were placed on taking funds out
of the country, investors sought opportunities within Malaysia. This led
to the growth of onshore financial instruments denominated in both the
domestic currency (ringgit) and foreign currencies (such as the U.S.
dollar), contributing to the development of a vibrant and diverse
financial market.

Enhanced Market Liquidity and Depth

The restrictions on funds flowing abroad may have contributed to
increased liquidity and depth in the Dollar-Ringgit markets. Investors,
both domestic and foreign, were incentivized to participate in onshore
markets, fostering the development of a more robust trading
environment. As a result, the Dollar-Ringgit markets likely saw
increased transaction volumes, a broader range of financial
instruments, and improved market liquidity, ultimately benefiting the
overall financial ecosystem in Malaysia.

(a) The Dollar-Ringgit markets emerged due to restrictions on capital

outflows. These markets facilitate the trading of the Malaysian
Ringgit against the US Dollar. Investors utilize this market for

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 activities such as hedging against currency risks or engaging in
international trade while complying with regulations. This
development contributes to the expansion of domestic financial
markets and increases demand for the Malaysian Ringgit.

(b) The Malaysian government's control over capital flows has

improved its ability to implement monetary policy effectively. This
control allows for better manipulation of interest rates and exchange
rates to manage inflation, stimulate investment, and promote
economic growth. However, it's important to recognize that these
policies can have both positive and negative effects, requiring careful
balancing to maintain overall economic stability and advancement.

7. Regulatory bodies have been established by various acts of the law passed in
parliaments and such enacted acts describe the regulators duties, jurisdiction, and how
they will enforce laws and regulations of forex trading. Laws enacted stipulate that all
brokers, signal sellers, and investment banks, must comply with the standards set by
forex regulators. Loh Xin Yi

(i) Express your opinion the importance of regulations in forex trading by

providing FOUR (4) points.

First, regulations in forex trading can provide protection to investors. By

setting standards for best practice, regulation protects investors against
scams and other fraudulent activities, such as misleading advertising.

Secondly, regulations ensure transparency in the forex market. Regulated

brokers and other financial institutions are required to maintain transparency
in all aspects of their activity. This includes a clear disclosure of pricing,
leverage, commissions and fees, as well as the risks associated with Forex
trading.

Thirdly, regulations maintain market integrity. Forex regulation helps market

manipulation and unethical practices, false advertising and misleading
communication. This contributes to preserving the Forex market’s integrity. In
addition, this will provide confidence to investors to invest in the forex
market.

Lastly, regulations promote financial stability. By overseeing the activity of

Forex brokers, regulators enforce rules that help ensure and maintain stability
and uniformity across the global financial ecosystem.

Regulations in Forex Trading:

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 (a) Ensuring Fairness and Justice:
Regulations establish a fair and just environment for all traders, regardless of their
size. These rules instill confidence in investors and legitimize forex trading as a
viable investment option.

(b) Maintaining Market Integrity and Transparency:

Regulations prevent unfair practices like market manipulation and insider trading,
ensuring the integrity of the market. Transparent trading conditions and reporting
requirements build trust among participants, making it difficult for unfair activities
to occur.

(c) Managing Risks:

Regulations often include measures to reduce risks for retail traders, such as
limiting leverage and enforcing capital requirements for brokers. These steps help
prevent large losses and safeguard traders from excessive exposure to the
market.

(d) Providing Legal Recourse:

In case of disputes between traders and service providers, regulations offer a
framework for legal recourse and dispute resolution. This allows traders to seek
solutions for any grievances they may encounter.

(e) Regulating Market Players:

Stringent regulations empower regulators to oversee forex brokers and banks,
ensuring they operate ethically. The ability to issue or revoke licenses encourages
clients to choose regulated and trustworthy brokers. However, regulatory
guidelines and enforcement vary by country, requiring brokers and banks to be
licensed and registered according to relevant legislation.

Sources:
• Bank Negara Malaysia: https://www.bnm.gov.my/documents/20124/277ebcd5-
9c21-209b-3984-170ba28351d6
• Finance Magnates: https://www.financemagnates.com/thought-leadership/the-
importance-of-regulation-in-forex-trading/

(ii) Do you think that regulations can avoid illegal forex trading?

Using regulations to eliminate forex trading is challenging. In general,

regulations can reduce illegal forex trading but cannot eliminate it entirely.
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 Strict regulations, continuous updates, and regular monitoring can be done to
reduce illegal forex trading to a minimum level.

Stringent regulations and enforcement measures can discourage fraud and safeguard
investors from illegal forex trading, but they cannot entirely eliminate it. Despite the
presence of rules, there remains a risk of deceitful activities, as some individuals exploit
jurisdictions with limited oversight.

Forex regulations lack global application, allowing major players in the industry to
manipulate the system. While regulations offer significant support, they are not flawless,
and collective efforts are necessary to enhance the safety of forex trading.

In summary, forex trading provides a secure investment opportunity for various investors.
However, guidelines play a crucial role in setting boundaries to prevent engagement with
unregulated or fraudulent brokers. Similar to laws governing everyday life, forex
regulations are sometimes breached, highlighting the ongoing need for vigilance and
collaboration in ensuring market integrity.

8. We have witnessed a sharp rise in forex trading scams in recent years. In 2021 itself,
600 investors lose RM12 million in alleged forex scam. As the regulatory authority
which governs all money-related matters, deliberate SIX (6) Bank Negara Malaysia’s
pre-emptive measurements to mitigate forex scam in the financial market. ZhenHao
Group

BNM has the authority to take formal enforcement actions against any person who fail to
comply with regulatory standards and other requirements issued pursuant to the laws the
BNM administers in promoting a safer and more trustworthy forex market ecosystem.

STRICT ENFORCEMENT: Pursuant to the FSA and IFSA, any person involved in
illegal foreign currency trading shall, on conviction, be liable to a fine not exceeding
RM50 million or to imprisonment for a term not exceeding ten years or to both.

SURVEILLANCE & INVESTIGATION: BNM has also established Financial

Intelligence & Enforcement Department (FIED), essentially conducts search and seizure
operations, and interview of witnesses to gather pertinent information towards successful
prosecution of offenders.

COLLABORATION & INFORMATION SHARING: BNM does maintain close

working relationships with the Attorney General's Chambers and other enforcement
agencies such as the Polis Di Raja Malaysia, CCM, Cooperatives Commission of
Malaysia, SC, Malaysian Anti- Corruption Commission, the Royal Customs of Malaysia,
Ministry of Domestic Trade, Co-operatives and Consumerism and Cyber Security
Malaysia.

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ENHANCE DUE DILIGENCE: BNM DD is to outline the industry standard practice to
be adopted by a licensed onshore bank (LOB), and by extension its Appointed Overseas
Offices (AOOs), when dealing with their clients in relation to the FE rules, either directly
with the LOB or via the AOOs.

CONSUMER EDUCATION PROGRAMME: The Bank, together with its smart

partners, has implemented the Consumer Education Programme (CEP) which provides
consumers access to information on financial products and services as well as money
management. CEP also aims to equip consumers with sufficient knowledge to understand
the risks and obligations involved in order to make an informed financial decision.

National Scam Awareness Campaign: The National Scam Awareness Campaign is a

continuation of the banking industry's efforts to combat scams as well as educate
consumers regarding scams while sharing simple online safety tips. Supported by Bank
Negara Malaysia.

9. As per September 2022, it was seen that the dollar is at its highest level since 2000.
Even as recession fears mount and the economy show signs of slowing, the dollar
continues to surge. Here’s a view of how the dollar compares to major currencies as
of 28 September 2022 compared to 2021.

EUR/USD: One euro buys $0.97 today, compared to $1.17 previously.

USD/JPY: One dollar buys 144.18 yen now, versus 111.54 previously.

USD/CHF: One dollar buys 0.98 Swiss francs today, compared to 0.93 previously.

GBP/USD: One British pound buys $1.09 now, compared to $1.37 previously.

USD/CAD: One dollar buys C$1.36 now, versus C$1.26 previously.

Discuss FOUR (4) points on how the U.S. Federal Reserve policy contributes to their
strong Dollar.

A strong dollar means that the value of the US dollar is higher compared to other
currencies. It's like when you have a lot of marbles and they're worth more than
someone else's marbles. The strength of a currency is always compared to another
currency, like the US dollar compared to the euro or yen.

(i) Changes in US monetary policy make US dollar investments more attractive.

The main reason the dollar is getting stronger is because of the US government's
monetary policy. They've decided to raise interest rates to control high prices. This
makes it more profitable for people to invest in the US. When the US offers better
returns on investments, people from other countries want to invest there, so they
trade their own currency for US dollars. This makes the US dollar stronger
compared to other currencies.

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 (ii) Geopolitical tensions after Covid-19 also make the dollar stronger. Even though
it's not directly because of US policies, conflicts around the world have made
people see the US dollar as a safe place to put their money. This means more
people are trading their own currency for US dollars. Also, because the US is
raising interest rates faster than other countries, it looks even better for investors.
So, they keep buying US dollars, which makes the dollar stronger.

(iii) The risk of a global recession is high, especially in Europe and Asia. When
there's a risk of a global recession, people want to protect their money. They see the
US dollar as a safe place to keep their money during tough times. For example,
many Russian investors are moving their money out of other currencies and into US
dollars. This makes the US dollar even stronger. Also, investors from all over the
world are taking their money out of other countries and putting it into US assets
because the US is raising interest rates. This makes the dollar stronger too.

Sources:

Federal Reserve:
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20221102.pdf

10. In May 2023, Bank Negara Malaysia (“BNM”) raised the overnight policy rate
(“OPR”) by another 25 basis points to 3.00%, making it the first hike in the year after
having four hikes in 2022. As the OPR increases, savings and investment rates will go
up too, benefiting the depositors and investors. By right, there will be a strong
demand for Ringgit, but it didn’t happen when we see the recent weakness in the
Ringgit especially against Dollar. Discuss your opinion by having THREE (3) factors
that drive the recent weakness in Ringgit in this scenario. Junn Hao’s group- Lee Ke Jie

Global Economic Conditions

The strength or weakness of a currency is often influenced by global economic conditions

and market sentiment. Even though the OPR increased, if there are concerns about global
economic growth, trade tensions, or geopolitical risks, investors may still be inclined to seek
safer assets such as the US Dollar. If global investors perceive the US Dollar as a safer haven,
they may sell off riskier currencies like the Ringgit, leading to its depreciation.

Market Expectations and Forward Guidance

Sometimes, the impact of a central bank's policy actions may be influenced by market
expectations and forward guidance. Forward guidance manages market expectations by
indicating future interest rate trends. Therefore, if market participants were expecting a more

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aggressive stance from BNM, such as a larger increase in the OPR, they may perceive the
actual increase is insufficient to combat inflationary pressures or to attract sufficient capital
inflows. This mismatch between expectations and reality can lead to disappointment among
investors, causing them to adjust their positions and potentially sell off the Ringgit.

Domestic Economic Factors

Despite the increase in the OPR, domestic economic conditions may not be perceived as
strong or stable enough to support a sustained appreciation of the Ringgit. Factors such as
high inflation, fiscal deficits, political uncertainty, or concerns about the health of the banking
sector can weigh on investor confidence and undermine the attractiveness of the currency. If
investors perceive these domestic factors as outweighing the impact of the OPR hike, they
may choose to sell the Ringgit in favour of other currencies or assets perceived as safer or
offering better returns.

Currently, the US dollar is getting stronger compared to many other currencies. This
makes it more expensive for us to buy things in other countries. The ringgit, our
Malaysian currency, is also getting weaker against the US dollar. Here's why:

The US government is making it more expensive to borrow money by increasing interest

rates. This makes it more attractive for investors to put their money in US dollars because
they can get better returns. As a result, more people are investing in US assets, which
makes the US dollar stronger. This could cause more money to leave Asian countries like
Malaysia, which might struggle because of the strong US dollar.

When there are problems around the world or if the global economy isn't doing well,
investors tend to play it safe and put their money in US dollars. This is because US
dollars are considered safe. Because of this, more money might leave Malaysia and other
countries, making the US dollar even stronger. However, it also depends on whether
investors can make more money by investing in the US market.

People think that the global economy might not grow as fast in the future. This could be
bad for Malaysia because we rely a lot on trade with other countries. If our trading
partners aren't doing well, it affects us too. So, if other countries' currencies become
weaker, our ringgit might also get weaker.

But it's not just about comparing the ringgit to the US dollar. The ringgit has actually
become stronger compared to currencies like the Japanese yen, euro, and Korean won –
all of which are important for our trade. That's why it's important for us to look at how
our currency is doing compared to the currencies of the countries we trade with.

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