In October 2005, Bank Negara Malaysia (BNM) issued guidelines on the short selling of securities in Malaysia’s money market. Previously, short selling was limited to primary dealers. With the new regulations, commercial banks, finance companies, merchant banks and discount houses that are interbank players, and universal brokers approved by the Securities Commission (SC) to undertake short selling transactions, are now all included as eligible participants. In 2007, Bursa Malaysia (formerly Kuala Lumpur Stock Exchange) allowed regulated short selling in the exchange. The rules on and definition of regulated short selling is linked below.
BNM still does not allow retail investors to short sell government securities. Only interbank players licensed under the Banking and Financial Institutions Act 1989 (BAFIA) and universal brokers approved by SC are allowed to conduct a short-selling transaction. Eligible securities for short selling include any specific issue of government securities with an outstanding nominal amount of at least MYR2 billion and remaining tenure to maturity of 10.5 years or less at the time when the short selling position is created. Participants can conduct transactions for their own account only. Other types of government debt securities and financial instruments, such as equities, are still not allowed to be sold short in Malaysian capital markets.
There are two types of short selling activities defined in the regulations:
Covered short selling—activities with borrowed securities obtained via reverse repurchase or securities borrowing and lending facilities on the short selling transaction date.
Naked short selling—activities without borrowed securities. Dealers close out the naked short selling position by conducting an offsetting deal at a later date.
Only covered short selling is allowed and the transaction should not exceed 12 months from the trade date. Naked short selling is not allowed in order to minimize market manipulation. To set the limitations and responsibilities of investments banks, BNM issued a framework for investment banks. A copy of the BNM circular is linked below.
Bursa Malaysia Derivatives Bhd, a wholly-owned subsidiary of Bursa Malaysia, operates the futures market for Malaysian Government Securities (MGS) and the Kuala Lumpur Interbank Offered Rate (KLIBOR). Bursa Malaysia is governed by the Futures and Industry Act of the Securities Commission (SC). The following are derivative instruments listed and traded under Bursa Malaysia:
3-month KLIBOR futures contract—the underlying instrument is the ringgit interbank time deposit in the wholesale money market on a 360-day year. Quarterly cycle contract months are March, June, September, and December up to five years ahead and two serial months.
3-year MGS futures contract—the underlying instrument are 3-year MGS. Contract months are the four nearest quarterly cycle months (March, June, September, and December).
5-year MGS futures contract—the underlying instrument are 5-year MGS. Contract months are the four nearest quarterly cycle months (March, June, September, and December).
10-year MGS contract—the underlying instrument are the 10-year MGS. Contract months are the four nearest quarterly cycle months (March, June, September, and December).
Interest rate risks can also be undertaken through interest rate swaps, interest rate swaptions, caps and floors, and bond options with onshore banking institutions via the over-the-counter (OTC) transactions market.
Banks in Malaysia provide brief overviews of interest rate swaps. Maybank's overview, which is linked below, provides detail on interest rate swaps, while tenors and indicative ranges are discussed on the website of RHB Bank Bhd, which is also linked below.
Malaysian credit default swaps are only available on international bond issues of sovereign borrowers and a few top quality financial institutions and corporations.
Cross currency swaps are limited to the OTC market. Overviews of cross currency swaps from Malaysian banks can be found by following the links provided below.