For the ringgit exchange rate market, the past two years have been uniquely challenging. At the end of 2014, the situation appeared rather benign. The ringgit was stable, market liquidity was good, trading activity was healthy with market volumes averaging USD11.8 billion daily while the volume for USD/MYR pair averaged USD8.3 billion in 2014. The subsequent period however, precipitated by the weakening external conditions, falling oil prices and domestic uncertainties have laid bare these notions. Volume and liquidity declined, bid-offer spreads widened and at times, there were one-way markets which exacerbated any movements. Given these developments, 2015 was a year where our actions were primarily geared towards stabilizing the markets. While this was clearly achieved, it was not without cost; a reduction in foreign exchange reserves, a markedly less liquid and volatile foreign exchange market, and a weaker currency. In the midst of this, an important observation that became increasingly evident is the continued vulnerability of our markets to the arbitrary and unpredictable devices of the offshore markets. Adverse conditions brought on by the NDF market Activities in the offshore market, in particular the ringgit non-deliverable forward (NDF) market, had brought on observable adverse impacts to the onshore market. To our disappointment, onshore players had become followers rather than leaders in determining domestic market rates. Consequently, taking the lead from the NDF market, the ringgit exchange rate has been quite volatile since last year, peaking at 23.1% for its 1-month historical volatility and is the highest among regional currencies for this year.
Besides tackling the various issues, risks and challenges of navigating these uncertain and volatile times, the FMC has been mandated to formulate and propose strategies to take the financial market development forward. I would like to thank the members of the Financial Market Committee and industry association representatives for collaborating with us for the common and greater good of market development. The FMC and its subcommittees have met several times. Some of the initiatives have already been rolled out; such as the extending of trading hours for the FX market and the KL USD/MYR reference rate. Some are going through the woodworks of development. I would like to discuss a few here. 1. We are embarking on a progressive journey of a more liberalized and conducive financial market operating environment. As a concrete step, I would like to announce the introduction of a pilot program for the USD/MYR and CNH/MYR markets. Under this program, residents will be allowed to undertake hedging transaction for USD and CNH against ringgit without the need for sighting of the underlying documents. Subject to a position limit, only a declaration by the customers will be sufficient. Accordingly, cancellation of the hedging will also be freely allowed. 2. To further complement this, the Bank is also currently working with the Securities Commission and Bursa Malaysia to facilitate the introduction of USD and CNH against Ringgit futures for the onshore exchange. Similar to the interbank market, these will, for now, be subjected to position limits, and for now only applicable to residents.