What ever happened to NDFs? In South East Asia they create market turbulence, elsewhere are not significant

Drastic action against trading the Malaysian ringgit in offshore NDF markets by the Malaysian central bank proves the emerging market FX specialists’ strategies to be absolutely right. Here is why


It was not a very long time ago that many companies in the OTC derivatives industry were talking at great length about the possible rise to prominence of non-deliverable forward (NDF) contracts, and many firms sought to offer them, especially to a British client base, largely because of the flexibility of the proprietary platforms that British brokerages provide in order to facilitate CFD trading.

Unlike spot FX, an NDF has similar virtues that stand CFDs out as popular instruments, as an NDF is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount.

This type of trading has garnered its greatest popularity in regions in which forward FX trading has been banned by the government, usually as a means to prevent exchange rate volatility.

In established markets, NDFs were heralded as a means by which OTC FX firms could mitigate the risk of being exposed to, and exposing their retail clients to, sudden and unexpected bouts of market volatility.

Strangely, NDF trading did not catch on to quite the extent that CFD trading has done, with a loyal and dedicated client base in Britain trading CFDs with vigor on a largely domestic market, via established, often publicly listed British electronic trading giants.

In emerging markets, however, things are somewhat different.

South East Asia has become very interesting markets for OTC firms to approach, with many firms showing a very poignant interest in Indonesia and Malaysia.

In Malaysia, the NDF market is such a pinnacle of interest that it created a massively disruptive influence, and attracted attention from the Bank Negara Malaysia – the nation’s central bank – and more specifically the Financial Market Committee (FMC) which oversees trading activities in Malaysia at central government level.

Today, the central bank has announced that the disruptive influence from the NDF market on the Malaysian ringgit has subsided, following Bank Negara Malaysia’s directive which was set in place last month to prevent the trading of the ringgit on offshore NDF markets.

The ringgit has come under renewed pressure against the green-back as US bond yields jumped on expectations that US President-elect Donald Trump’s proposals for infrastructure spending and tax cuts will boost economic growth and inflation.

Such rise in US bond yields increases the US dollar’s appeal and reduces the attractiveness of investing in emerging-market assets, said Reuters. The ringgit closed down 0.1% at 4.4835 to the US dollar yesterday.

In a statement yesterday, the FMC also said liquidity on the onshore FX market continue to register a daily average volume of around US$9 billion (RM40.32 billion) this month, comparable to the average of US$8 billion from January to November 2016.

“FX flows comprise supply and demand from all major participants, including the exporters/importers, portfolio-related and direct investments,” stated the central bank.

This highlights one of the most advantageous aspects of NDF trading, that being the arbitrage opportunities that are less present in other categories.

Under certain circumstances, the rates achievable using synthetic foreign currency lending may be lower than borrowing in the foreign currency directly, implying that there is a possibility for arbitrage. Although this is theoretically identical to a second currency loan (with settlement in dollars), the borrower may face basis risk: the possibility that a difference arises between the swap market’s exchange rate and the exchange rate on the home market. The lender also bears counterparty risk.

The borrower could, in theory, enter into NDF contracts directly and borrow in dollars separately and achieve the same result. NDF counterparties, however, may prefer to work with a limited range of entities, such as those with a minimum credit rating.

One example of a firm that has begun to take the emerging market pairs which can be traded as NDFs into the hands of western traders is Jon Vollemaere’s R5FX which is an institutional Liquidity pool for eNDF’s and emerging market currencies.

Mr Vollemaere has stated that upcoming regulation requires FX trading banks to drastically change their current trading channels for the BRICS countries, N-11 and other Emerging Market/NDF currency pairs.

This action by the central bank of Malaysia indeed proves him right.

  • Read this next

    Digital Assets

    Meme Coin Communities Gear Up for the CoinMarketCap Crypto Awards

    CoinMarketCap’s Crypto Awards 2024, the first edition of a new annual event, is captivating the global crypto community. This is especially true for the Meme Coin Of The Year category, where voting has become a battleground for the most passionate and vibrant communities in the crypto space.

    Digital Assets

    Sui Recognized as 2024 Blockchain Solution of the Year at AIBC Eurasia Awards

    The Layer-1 Received the Top Honor at the Eurasia Awards While Experiencing a Period of Unprecedented Growth and Recognition

    Crypto Insider

    Vitalik Buterin, Sandeep Nailwal Lead Decentralized AGI Summit, Address Centralized AI Risks at ETHDenver

    Sentient and Symbolic Capital’s Decentralized AGI Summit will feature leading Decentralized AI authorities like Vitalik Buterin and Sandeep Nailwal.

    Digital Assets

    Aethir Unveils Its First Decentralized AI Node Sale

    Aethir, a leader in decentralized GPU cloud infrastructure, has announced its highly anticipated Node Sale.

    Market News

    Weekly data: Oil and Gold. How they might be affected in the short term?

    This preview of weekly data looks at USOIL and XAUUSD where economic data coming up later this week are the main market drivers for the near short-term outlook.

    Digital Assets

    BitForex goes offline after mysterious $57 million withdrawal

    BitForex, the Hong Kong-based cryptocurrency exchange, abruptly went offline following a mysterious withdrawal of $57 million from its hot wallets. Blockchain detective ZachXBT was among the first to spotlight this, revealing that BitForex has ceased withdrawal transactions and its team appears to be unresponsive.

    Digital Assets

    Should the largest Bitcoin trade be priced in BTC or USD?

    Three days ago, the Bitcoin network witnessed a staggering transaction of 26,139 BTC, valued at $1.347 billion. This recent transaction contrasts sharply with a notable event from 2011, where 500,000 BTC were moved, then valued at around $1.13 million.

    Market News

    EURUSD volatility abound as more Americans buy houses whilst Europe lags behind

    EURUSD volatility has been on the rise, reflecting contrasting trends between the United States and Europe, particularly in the housing market.

    Institutional FX

    Aquis Markets launches conditional orders in the UK and EU

    Conditional orders allow members to post the same liquidity on multiple venues simultaneously without the risk of over-trading.