KUALA LUMPUR: BANK Negara Malaysia will expand the regulate d short-selling of Malaysian Government Securities (MGS) to all resident entities, including investors and issuers, effective May 2.
Currently, only licensed banks and investment banks were allowed to short-sell MGS, said the central bank.
In a separate announcement, the Securities Commission (SC) has allowed principal dealers to undertake regulated shortselling of corporate bonds.
This expanded the range of bonds that could be short-sold, the SC added.
“This latest initiative is part of the SC’s continuous efforts in enhancing the liquidity of the secondary bond market while ensuring the comprehensive and facilitative infrastructure and regulatory framework,” it added.
Meanwhile, speaking at a press conference yesterday, Bank Negara assistant governor Adnan Zaylani Mohamad Zahid said the MGS move was to boost liquidity and provide “lib eralisation” in the domestic bond market.
Overall, the MGS move is among several measures under Bank Negara’s second series of initiatives announced yesterday to expand and deepen the onshore financial markets.
Other measures include streamlining the central bank’s framework on hedging and providing greater flexibility in hedging.
Under the move, non-bank entities will be allowed to have a net forward hedging position of up to 100 per cent of their underlying assets and manage an additional 25 per cent of foreign exchange exposure.
The first series was introduced last December.
Adnan explained that shortselling of instruments, in this case MGS, was an important component of market-making, whereby a bank or a financial institution would not have to warehouse inventory prior to being able to provide prices on it.
“The short-selling guideline would allow financial institutions to fulfil their market-making objectives and source for necessary inventory before the transaction needs to be covered. Short-selling also has its benefits for other institutions or entities as it allows hedging of interest rate using MGS.”
This was a common practice in many developed markets where short-selling of government bonds was used as a tool to manage interest rate exposure, added Adnan.
“This is a liberalisation of government bond securities market where under a current framework entities, investors and issuers can undertake short-selling of MGS from May 2.”
Adnan said the central bank would issue guidelines on the new framework to give time to market participants to make the necessary preparation.