Malaysia Regulatory Update: Foreign Exchange Administration (FEA) Rules
In a bid to calm the markets and to improve liquidity, Bank Negara Malaysia (BNM) recently issued the revised Foreign Exchange Administration Rules (FEA Rules) effective 5th December 2016, as a measure to accelerate the development of Malaysian financial market and to promote financial stability. The objectives of the revised FEA rules are to further facilitate foreign exchange risk management, to promote settlement of trade and investment in ringgit as well as to enhance depth and liquidity of onshore financial market.
Under the new Foreign Exchange Administration Rules, settlement of domestic trade in goods or services between residents shall be made only in ringgit Malaysia. Resident exporters may retain up to 25% of export proceeds in foreign currency and 75% of the proceeds is to be converted into ringgit. All ringgit proceeds from exports can earn a higher rate of return via a special deposit facility.
Another highlight of the recent changes is that foreign currency proceeds from export of goods must be maintained in a Trade Foreign Currency Account (Trade FCA) with an onshore bank. The Trade FCA could be used to facilitate import payments and loan obligations as well as other current international transactions such as dividend and royalty payments.
Effective 5 December 2016, conversion of ringgit to foreign currency for credit into Trade FCA is allowed if there are insufficient funds. In addition to the newly announced hedging measures, exporters are also able to hedge and unhedge up to 6 months of their foreign currency obligations.
Resident entities with domestic ringgit borrowing are free to invest in foreign currency assets both onshore and abroad up to the prudential limit of RM50 million. Residents without domestic ringgit borrowing shall continue to enjoy the flexibility of investing in foreign currency assets both onshore and abroad up to any amount. Generally, funds in the Investment FCA may be used freely for all types of payments including import payments and loan repayment.
Bank Negara Malaysia said that the current FX market stood ready to provide liquidity if necessary to ensure an orderly market. These measures are intended to promote a deeper, more transparent and well-functioning onshore foreign exchange market (FX market) where genuine investors and market participants can effectively manage their market risks with greater flexibility to hedge on the onshore market. A deep and liquid onshore FX market will enable investors to better manage the volatile currency movements.
However, the recent announcement of the revised FEA rules has created a stir in the market. In accordance with the new rules, there are some other approaches for investors as alternatives in their business. One of them would be setting up a company in Singapore. Obviously, having a company in Singapore is a good option because investors could have an easy access to their business funds without worrying the currency control, and they could remit money back to Malaysia easily.
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