Restricted Foreign Exchange (FX) markets are frequently found in frontier and emerging economies. A global market accessibility review published by MSCI in July 2019 notes constraints on the onshore currency market in 40 countries including Malaysia where FX transactions must be linked to security transactions, China which also maintains a separate offshore market for its currency, and Bangladesh where FX transactions must be executed by the local custodian.
We typically see the strongest restrictions in smaller economies, as they are most vulnerable to capital flows, but these can be removed over time as the economy matures. For example, the market is waiting to hear the outcome of India’s review of facilities for hedging of foreign exchange risk by non-residents and residents. In other cases, a country may maintain restrictions even as it moves beyond developing status or may re-impose restrictions if the economy experiences a severe downturn.
There is considerable value for corporates and investors to work with a partner who can guide them through complicated and evolving landscape of FX restrictions.
Proof of intent
Governments will often limit the flow of funds into and out of a country to maintain macroeconomic stability. The objective is typically to ensure the FX level accurately reflects the economic fundamentals of the country rather than to achieve a pre-determined exchange rate.
Implementation of FX restrictions varies widely but frequently requires the party involved to demonstrate that they require FX for real economic activity. For example, a Regulator may require banks to obtain ‘proof of underlying’ from an investor, such as the purchase of onshore bonds. Alternatively, a corporate might be required to prove it has cross-border cash flows related to its onshore business. Such restrictions are generally positive for onshore corporates as having a stable exchange rate assists in long term planning and access to offshore financing.
FX restrictions can make it difficult for international investors to take advantage of opportunities offered by local securities markets, so we frequently see regulatory changes aimed at increasing cross-border flows.
China, for example, maintains FX controls but has been actively opening its capital markets to foreign investors via the Bond Connect programme and associated FX hedging channels, where Standard Chartered is a leading market maker*.
Multinationals looking to do business in various onshore locations will need to deal with the complexities of a multitude of different national regulations. In some cases, they will be required to establish a local legal entity and credit lines to face onshore counterparties directly. Adding to the complexity, these situations are rarely static. As such, having a partner with local presence is vital to maintaining a current understanding of what’s happening – and what is likely to change – at the regulatory level in jurisdictions with FX restrictions.
Central banks and regulators in these markets often conduct industry consultations to survey global best practices and discuss practical applications in local markets. Standard Chartered’s strong relationships with regulators play a key role in helping shape regulatory frameworks by connecting policymakers with potential investors from our global client base.
Working with a partner that actively engages with local authorities can ensure you are well prepared to adhere to and take advantage of regulatory changes as soon as possible.
“Having a partner with local presence is vital to maintain a current understanding what is happening – and what is likely to change – at the regulatory level in jurisdictions with FX restrictions”
Standard Chartered makes access simple
Preparing to transact in a restricted market is just one part of the puzzle - many countries also limit the type of hedging products that can be employed. For example, some markets only allow spot or forward transactions, while others may allow corporates to buy vanilla options but not use leverage. As such, working with a bank having local networks is vital for clients to identify which products are accessible to provide the most cost effective and efficient hedge.
To reduce complexity for clients, Standard Chartered enables trading of restricted currencies in some markets using an offshore International Swaps and Derivatives Association (ISDA) master agreement. This means clients don’t have to re-paper with each of the Bank’s onshore entities – they can transact with our global dealing hubs and we will assist them in delivering local currency to their onshore custodian or counterparty. This specific approach is not applicable to every jurisdiction and is only possible in consultation with Regulators – which we are well-placed to support given our long-standing commitment in many restricted markets. We can also liaise directly with their custodian to complete the documentation to support the transaction and, for some markets, the entire process can be executed on our electronic dealing platforms.
Another characteristic of restricted markets is that onshore hedging is frequently cheaper and less volatile than offshore hedging, particularly in times of market stress. We work with clients to convert offshore hedges to their onshore equivalents - allowing them to exactly match onshore cashflows, accurately track local benchmarks and save on hedging costs.
We have onshore market experts in each of our global trading hubs, allowing us to assist clients with restricted markets wherever required – at their corporate headquarters, with their regional treasury or with their onshore subsidiaries. In challenging market environments – which are expected to continue in the near term – corporates and investors should take care to partner for their FX needs with a bank that has the right on-the-ground perspective.
About the Author
Tony Hall, Global Head of Macro Trading, Financial Markets
Tony Hall joined Standard Chartered Bank as Global Head of Macro Trading, Financial Markets in July 2019. He is a member of the Financial Markets Executive Committee (FMExCo) and is based in Singapore.
Tony has close to 25 years of global experience in the currency markets, including more than 18 years in Singapore, where he was most recently the Head of FX, Rates and Credit for Asia Pacific at UBS. Tony began his career with UBS in 1995 as an FX Derivatives Floor Trader on the Chicago Mercantile Exchange and went on to hold various leadership positions from 2005 to 2019, including Global Head of FX Derivatives Trading and Head of FX, Rates & Credit, APAC.
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