This has resulted in an extension of the clearing obligation to all standardised OTC derivatives; (ii) improve their resilience by further strengthening their risk management framework, as the concentration of clearing among a small number of entities requires a particularly robust framework. The principles applicable to financial market infrastructures have also been strengthened, with the publication in 2012 of the Principles for Financial Market Infrastructure (PFMI). This is still the reference text for market infrastructure regulation today. In Europe, these PFMI were translated into hard law through the European market infrastructure regulation (EMIR), which was adopted in 2014 and is applicable to CCPs and central trade repositories. (d) Better regulate the non-bank financial system to enable sound market financing: the aim is to strengthen supervision of shadow banking as the financial crisis showed that the accumulation of risks on the periphery of the banking system, sometimes without effective oversight, could have devastating effects. We now have a better understanding of the non-bank financial system, thanks to the FSB’s mapping work, which makes it possible to measure its developments and the risks associated with it. The FSB has also worked to strengthen investment fund regulations to better manage liquidity risk – recent episodes of massive capital outflows by UK and French funds have demonstrated the importance of managing this risk well – and leverage risk.
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.