C16. Structure of the Wholesale Market

Question 1

what is wholesale market

Answer 1

defined as an institutional market, whereby financial institutions trade financial products among themselves & with other institutional parties.

In Malaysia, financial institutions are institutions subjected to BNM regulation & supervision under the FSA, IFSA and those institutions supervised by the SC under the CMSA.

The transactions usually involve large amounts and are conducted either through voice brokers, direct or through other electronic broking services.

Question 2

what are some characteristics of wholesale market?

Answer 2

a) Transaction of approved financial products between 2 principals which are Approved Interbank Institutions (AII)35

b) Transaction between an AII and another corporation with the following conditions:
(i) The minimum amount of MYR 50,000
(ii) Negotiable and conducted orally or electronically by dealers
(iii) Oral agreement is deemed as binding to be followed by documentation

c) Any other transaction not meeting the above will be deemed as retail transactions

Question 3

what are the common feature that all market participants share?

Answer 3

upholding of the integrity of the market to ensure high standards of professionalism & adoption of international best market practices as defined in Code of Conduct for Malaysia’s Wholesale Financial Markets and The FX Global Code.

Question 4

who are the main participants trading in the wholesale interbank market?

Answer 4

a) Central Bank—BNM, regulator

b) Financial institutions:
(i). Commercial banks
(ii). Islamic banks
(iii). Investment banks
(iv). Selected insurance companies (some are appointed as AIIs, but they are only allowed to participate in interbank trading of FI securities)
* AIIs: approved interbank institutions *
(v). Selected Developmental Financial Institutions (DFIs)

c) Cagamas Berhad

d) The Islamic Corporation for the Development of the Private Sector (ICD)

e) Money brokers

Question 5

The interbank participants in turn serve the corporate sector as their customers. Who are some of the corporates?

Answer 5

a) Local corporates
b) Multinational companies (MNCs)
c) Other insurance companies
d) Fund management companies
(e) Government agencies
e) Pension funds

Question 6

Who are Approved Interbank Institutions (AIIs)?

Answer 6

Financial institutions that are appointed by BNM to participate in the interbank market.

The appointment of the AII is the sole prerogative of BNM and the appointment is based on certain conditions as defined by BNM, among others:
a) capital adequacy
b) management strength,
c) dealing &processing capacity
d) robust internal controls
e) good systems & sound reputation.

BNM may also appoint other financial intermediaries to be an AII on a case-by-case basis.

Currently, selected DFIs are SME Bank, Bank Rakyat, BSN and Bank Pembangunan.

Question 7

what are the privileges of AIIs?

Answer 7

a) Borrow and lend with each other in short-term money including repurchase agreements (repos)

b) Allowed to act as agent for others dealing in financial products

c) Eligible to act or be appointed as Principal Dealer or Authorised Depository Institution (ADI)

d) Eligible to issue Negotiable Instruments of Deposits (NIDs)

Question 8

Cagamas and the Islamic Corporation for the Development of the Private Sector (ICD) are appointed and allowed to take part in interbank market, but subject to certain privileges.

What are those privileges?

Answer 8

a) Allowed to deal in interbank deposits and repos

b) Allowed to deal in approved financial products with other AIIs

c) Not allowed to act as agent for third party

d) Not allowed to issue Negotiable Instruments of Deposits (NIDs)

a valid transaction is a transaction whereby one of the parties in the transaction of any financial products must be an AII.

Question 9

what are Negotiable Instruments of Deposits (NIDs)

Answer 9

NIDs are deposit certificates used in the wholesale money market that are regularly purchased and traded by institutional investors and high-net-worth individuals in the stock market.

investors have the choice of depositing their money for a fixed period of time to generate a higher interest rate than those offered by banks for fixed deposits.

can be traded or sold back to the issuing bank prior to maturity with no penalty.

Question 10

approved financial products traded in the interbank markets between AIIs and between AIIs and other corporations and government agencies are:

Answer 10

a) Ringgit interbank deposits
b) Foreign currency interbank deposits
c) NIDs
d) Bankers Acceptances (BAs)
e) Spot and forward foreignexchange
f) Derivatives products
g) Corporate bonds and sukuk (non-listed)
h) Scriptless Securities Depository System (SSDS) Securities
i) Repurchase agreements (repos)/Sell Buy Back Agreement (SBBA)
j) Securities borrowing and lending (SBL)

Question 11

Scriptless Securities Depository System (SSDS) Securities include:

Answer 11

a) Malaysian government securities
b) Malaysian treasury bills
c) BNM notes
d) Government investment issues
e) Sukuk Perumahan Kerajaan
f) Non-listed corporate bonds and sukuk
g) Khazanah bonds
h) Cagamas bonds
i) Any other instruments approved by BNM

Question 12

who are the people that participates in the wholesale interbank market?

Answer 12

dealers & brokers

Question 13

what are the roles of dealers and brokers?

Answer 13

dealers are employed by the financial institutions whose role is to transact in any or all of the financial products in the market.

Brokers act as the middle-man to facilitate transactions between the market participants but are not an actual party to the transaction.

brokers arrange deals between AIIs, between AIIs and corporate, insurance companies (for bonds only) and between AIIs and other offshore bank counterparties through international money brokers where they are affiliated.

Question 14

what are the requirements of dealers and brokers?

Answer 14

have to be registered as members of Persatuan Pasaran Kewangan Malaysia (PPKM) /Financial Market Association Malaysia (FMAM).

Under the system of certification process, all dealers and brokers will have to pass the Pasaran Kewangan Malaysia Certification (PKMC) examination (organised jointly by PPKM and AICB) before they are authorised to deal in the interbank market & conduct transactions with corporate customers.

Question 15

can provisional members negotiate or conclude deal on their own?

Answer 15

provisional members are not allowed to negotiate or conclude deal on their own in the interbank and with customers, however, they may be allowed to help the authorised dealers and brokers as per internal policies & controls of respective institutions.

Question 16

when should institutions & money brokers submit a full list of their dealers & brokers to the secretariat of the PPKM/FMAM for onward submission to BNM?

Answer 16

twice a year as at 30 June and 31 December each year.

They are also required to inform the secretariat of PPKM/FMAM of any changes in between the reporting periods.

Question 17

what are the objectives of the Principal Dealers (PDs) System?

Answer 17

to develop the primary and secondary markets of public debt securities, which includes building a stable demand for Government, BNM and BNM
Sukuk Berhad issuance & trading these papers in the secondary market to create liquidity.

Question 18

how does banking institutions get selected as PDs and i-PDs?

Answer 18

BNM appoints banking institutions based on a set of criteria, including their ability to handle large-volume transactions as measured by their participation in the primary auctions, secondary market trading volumes and their overall risk management capabilities.

Question 19

what are some of PDs and i-PDs obligations?

Answer 19

a) bidding for all Government and BNM papers in the primary market (i-PDs are required to bid for only Islamic Government and BNM papers)

b) provide 2-way price quotations for benchmark securities under all market conditions to ensure liquidity in the secondary market.

c) PDs are also required to bid for the money market and repo auctions conducted by BNM occasionally

Question 20

what are some of the responsibilities of conventional PDs?

Answer 20

(i) All PDs must bid at least 8.5% in any primary issue of conventional specified Scriptless Securities Depository System (SSDS) securities, the total bids by all PDs to be at least 102%.

(ii) All PDs must bid at least 6.0% in primary issue of Islamic specified SSDS securities, the total bids by all PDs (both conventional and Islamic) to be at least 100%.

(iii) All PDs must provide two-way price quotations for the current benchmark specified SSDS securities at all time.

Question 21

what are some of the responsibilities of islamic PDs?

Answer 21

(i) All iPDs must bid at least 4.0% in primary issue of Islamic specified Scriptless Securities Depository System (SSDS), so that total bids by all PDs (conventional and Islamic) to be at least 100%.

(ii) All Islamic PDs to provide 2-way price quotations for the most recent of GII papers on a ‘search and locate’ basis (i.e. on a best effort basis).

Question 22

what are some of the privileges of PDs?

Answer 22

a) PDs are allowed to net-off their entire holdings of specified SSDS securities from their Eligible Liabilities (EL) base.

b) PDs are eligible to continuously view bid-cover ratio for each securities auction until closing time.

c) PDs can be both lender & borrower under the Securities Borrowing and Lending (SBL) programme.

d) PDs are accorded priority in the event that a PD’s bid is equal to a non-PD’s in the bidding of securities-driven repo with BNM.

e) PDs are allowed to amend customers’ original bids submitted through FAST for selected securities as specified by BNM. The amendment is subject to FAST rules.
(i) PDs must have in place procedures and controls to amend customer bids as such rules are not covered under FAST.
(ii) PDs have to enter into agreement with customers clearly stipulating the terms and conditions.
(iii) PDs are only allowed to change the bidding rate and not the amount.

f) PDs are eligible to participate in half-yearly consultation between BNM and PDs and iPDs.

Question 23

what are the responsibilities of non-PDs?

Answer 23

non-PDs are not obliged to continuously quote 2-way prices at all times, they are encouraged to do so to enhance market liquidity.

The non-PDs are encouraged to also participate actively in the primary auction through the PDs.

Question 24

what are the privileges offered to non-PDs?

Answer 24

a) Non-PDs are allowed to act as agent for third party orders

b) Non-PDs are allowed to issue NIDs

c) Non-PDs may be appointed as PDs if they fulfil certain criteria

d) Non-PDs may be appointed as Authorised Depository Institutions

Question 25

what are the roles and responsibilities of ADIs?

Answer 25

a) ADIs are to withhold tax on the interest coupon or dividend payments on non-residents if any.

b) ADIs are to segregate aggregate customers’ accounts and maintain a separate account for each customer in their internal records for their securities holdings under the resident’ and ‘non-residents’ omnibus accounts.

c) ADIs are responsible to pay coupon interest, dividend or redemption proceeds to beneficial owners upon receipt of the payment.

d) ADIs are prohibited from using securities belonging to their customers for any purpose without prior written approval of the customers.

e) ADIs are to send statement of account to beneficial owners on a monthly basis.

Question 26

what is Kuala Lumpur Interbank Offered Rate (KLIBOR)?

Answer 26

The KLIBOR rates are rates submitted by submitter banks that represent the rates that the submitter banks are willing to lend ringgit funds to interbank participants.

KLIBOR fixing rate is used as reference rate for all ringgit interest rates products (eg: interest rates swap, options, futures & structured products)

BNM has appointed 11 financial institutions to be KLIBOR submitter banks for a two-year period.

Refinitiv Malaysia Sdn Bhd has been appointed as the designated KLIBOR distributor responsible for compiling, calculating and disseminating KLIBOR fixing rates.

Question 27

what are the obligations of KLIBOR submitter banks under KLIBOR Rate Setting policy?

Answer 27

a) Provide quotations for KLIBOR for tenors of 1, 2 and 3 months at a spread of not more than 5 basis points per transaction size of RM5m.

b) Provide quotations for KLIBOR for tenors of 6 and 12 months at a spread of not more than 10 basis points per transaction size of RM5m.

c) Committed to deal at the quoted rates at a standard lot of RM5m with BNM for all tenors.

d) Honour the KLIBOR rates when other KLIBOR submitters wish to deal on the quoted rates 10 minutes before 11.00 a.m. fixing time.

e) Update the designated KLIBOR distributor on the KLIBOR quotations no later than 11.00 a.m. of each working day.

f) Promptly inform BNM of any issue detected that may affect the integrity of the KLIBOR rate setting process.

Question 28

what are the roles of KLIBOR Distributor?

Answer 28

a) Promote consistent, accurate and timely dissemination of KLIBOR rates.

b) Have in place procedures to safeguard confidential information and have controls to prevent any unauthorised disclosure of info.

c) Make available KLIBOR rate calculation methodology on its website homepage & accessible to all its clients.

d) Ensure timely transmission of the official KLIBOR rates to other info providers.

e) Inform BNM of any potential manipulation of the rates.

f) Have in place contingency procedures in the event of potential operational disruptions affecting the discharge of its obligations.

g) In case of a suspected calculation error by a designated KLIBOR distributor, such error must be reported to BNM through phone within 10 mins of publication of the KLIBOR rates, followed by email. BNM will assess and decide whether a recalculation is warranted.

h) In the event of a recalculation, the revised KLIBOR rates will be published by 12.00 p.m. on the same day.

i) store historical data and make available the data on KLIBOR as and when requested by BNM

Question 29

The onshore banks are required to use only the official Malaysian USD/MYR rate fixing as reference for all foreign exchange contracts involving ringgit.

Question 30

how is the USD/MYR Reference Rate being set?

Answer 30

weighted average volume of the interbank USD/MYR spot transacted rate between 8.00 a.m. to 3.00 p.m.

The fixing rate will be published daily at 3.30 p.m. BNM also extended the official trading closing hour for onshore ringgit market from 5.00 p.m. to 6.00 p.m.

Question 31

what is Real-time Electronic Transfer of Funds and Securities (RENTAS) system?

Answer 31

a) real-time multi-currency gross settlement system for large funds transfers

b) settlement system for multi-currency primary and secondary market transactions for:
(i) Government securities and unlisted corporate bonds
(ii) USD/MYR payment versus payment (PvP) settlement via USD CHATS (Clearing House Automated Transfer System) for its clearing members.

Question 32

How does RENTAS mitigates or eliminates settlement risk?

Answer 32

RENTAS facilitates real-time gross settlement transaction between participants with finality

Question 33

what transactions can be performed by RENTAS?

Answer 33

1. Interbank funds transfer;
2. Cash withdrawals from BNM
3. Statutory reserve adjustment;
4. Money market settlement;
5. Ringgit leg of foreign exchange; and
6. Scripless securities transfer.

Question 34

what are the major components of RENTAS?

Answer 34

(a) Settlement Account Sub-System
(b) Securities Depository Sub-System or e-SSDS
(c) Interbank Funds Transfer System

Question 35

whats the function of Settlement Account Sub-System (SAS)?

Answer 35

All RENTAS settlement accounts are maintained with BNM. These accounts serve as a settlement account among participants for all RENTAS MYR transactions that are settled across the books of BNM.

Question 36

what is Interbank Funds Transfer System (IFTS)?

Answer 36

IFTS is an online service for all RENTAS participants to send and receive interbank payments.

It allows RENTAS participants to:
a) Monitor and check on their payments
b) Relay payments instructions to the SAS for accounting postings
c) Assign payments to IFT Queue if the participant does not have sufficient funds to settle the payments

Question 37

are RENTAS payments final and irrevocable?

Answer 37

Yes. All RENTAS payments are final and irrevocable after paying participant submits the payment instruction to RENTAS Central Host (RENTAS CHS), and once the payment instruction meets all conditions necessary to execute the final transfer of funds across the books of BNM, the paying participant’s account will be debited and the receiving participant’s account is credited on a final and irrevocable basis.

Question 38

what is Securities Depository Sub-System (e-SSDS)?

Answer 38

e-SSDS is a RENTAS sub-system that is used for debt securities corporate actions processing.

e-SSDS also facilitates new issuances & allotment of retail bonds issued by the Gov & BNM to the public.

Corporate actions for retail bonds are processed by e-SSDS which is interfaced to RENTAS for settlement.

all RENTAS e-SSDS sales & repos are FINAL & IRREVOCABLE after the seller submits the transaction to RENTAS Cemtral Host (CHS), the buyer confirms the transaction & the transaction met all conditions to execute the final transfer of funds across the books of BNM from the buyer to seller’s settlement accounts, simultaneously against the transfer of securities from the seller to the buyer’s securities accounts.

Question 39

what is Fully Automated System for Tendering (FAST)?

Answer 39

FAST serves as an entry point for primary activities of securities issuance, money market tender and repo transactions.

Question 39

what are the 2 components of FAST operational procedures?

Answer 39

A) MYR Intraday Credit Facility
B) MYR Auto-collateralised Overnight Funding Facility (ACOFF)

Question 40

what is MYR Intraday Credit Facility?

Answer 40

credit line provided by BNM to the RENTAS participants between MYR settlement opening time (8am) until intraday credit cut-off time (4.30pm, no more borrowing from K account) to ensure liquidity in RENTAS for timely settlements.

• 6pm: cut-off time for the repayment of MYR Intraday Credit Facility.

The facility is subject to certain conditions.

Question 41

how is the intraday credit granted?

Answer 41

in the form of collateralised borrowing in tranches of RM5m against participants’ securities.

The eligible securities are kept in a special collateral account—K account to facilitate the earmarking of collateral securities for the intraday credit drawdown.

Question 42

what are some of the characteristics of operations of the intraday credit using K account?

Answer 42

(i) The repayment of intraday funding is automatically done whenever the participant’s Settlement Account has sufficient funds to redeem the earmarked securities in the K account.

(ii) The amount of intraday credit shall be determined by the amount of eligible securities in the K account in multiples of RM5m.

(iii) BNM has sole discretion in tagging & identifying a certain value to the eligible securities against the intraday credit.

(iv) All rights, title and interest shall vest in BNM free and clear of any liens, claims, charges, or encumbrances.

(v) BNM reserves full right to remove the identified securities from the participants’ K account.

(vi) BNM reserves full right over the securities if participant fails to discharge its obligations.

Question 43

what is MYR Auto-collateralised Overnight Funding Facility (ACOFF)?

Answer 43

overnight credit line BNM offers to participants who cannot settle their Interbank GIRO & Direct Debit clearing positions during the MYR evening settlement window.

Unlike the intraday credit facility, ACOFF is exercised through the outright sale of participants’ securities in K accounts to BNM.

All rights, title and interest in and to any identified securities shall vest in BNM free and clear of any liens, claims, charges or encumbrances.

Question 44

how do FAST and ETP systems connect with each other?

Answer 44

information on debt securities created in FAST is transmitted to the ETP platform operated by Bursa Malaysia to facilitate the secondary trading of debt securities.

ETP comprises trading and reporting functions. All OTC trades are required to report to ETP within 10 minutes after conclusion of trades.

Question 45

what is Central Securities Depository (CSD)?

Answer 45

RENTAS is a CSD set up to ensure the orderly processing of securities deposited. Among the
facilities of RENTAS are:
(i). To facilitate efficient depository of debt securities

(ii) To ensure safe custody of Global certificates & other documents representing debt securities

(iii) To facilitate the registration of debt securities arising from trade transactions involving deposited debt securities

(iv). To establish a proper & efficient system for the verification, inspection & recording of securities deposited.

Question 46

when should facility agents make tender announcement?

Answer 46

tender announcement should be made at least 3 business days before the issue date through FAST system and major newspapers with details on the issuance size & the exact date of the issue.

The market participants shall commence the ‘when-issued’ (WI) trading from the tender announcement date after stock creation in FAST.

Question 47

for the auction of MGS and GII, who is it open to?

Answer 47

MGS: exclusively open to PDs
GII: exclusively open for PDs, Islamic PDs & all Islamic banks

To recap: Every 2 years, BNM will appoint a group of financial institutions to be PDs & iPDs for a 2-year period.

Question 48

how are the bids submitted for new issue and reopening/secondary market trading?

Answer 48

new issue: weighted average yield of the successful bids.
reopening/secondary market trading: price basis since the coupon rate is already known. (Price can be computed for a given level of yield)

Question 49

how do PDs submit their bids?

Answer 49

• All bids are submitted by PDs via FAST.
• Non-PDs/other interbank institutions can submit their bids via a PD with a max allotment limit of 30% per bidder.
• RENTAS will allot the securities to the successful bidders by lodging the securities with their appointed ADIs.
• Settlement will be on a Delivery versus Payment (DvP) basis through RENTAS automatically
• DvP: buyer’s cash payment for securities must be made prior to or at the same time as the delivery of the security.

Question 50

can BNM participate in auctions?

Answer 50

Yes, with the objective of obtaining securities for its market operations.

But to ensure fairness and transparency, BNM’s bid will be on a non-competitive basis & the allotment to BNM will be based on the weighted average yield of the successful bids of other market participants.

The maximum allotment limit for BNM is set at 10% of the current total issue size.

Question 51

what is When Issued (WI) trading and its main purpose?

Answer 51

Refers to a transaction made conditionally, because a security, tho authorized, has not yet been issued.

The main purpose of WI trading is to aid price discovery process.

Question 52

what is the trading process and timeline of WI trading?

Answer 52

WI trading will commence upon announcement of a Government securities primary or reopening of issue & continues until the tender results are announced to the market.

Trading of WI is based on yield of up to 3 decimal places.

The value date (aka settlement date) of WI trading must be on or after the Government securities issue date and the standard value date is issue date plus 2 business days (T+2),

On issue date, the seller shall retrieve the WI trades and update the price and proceeds before sending to buyers for confirmation.

Question 53

can issuance in WI trading be cancelled?

Answer 53

Yes. if issuance is cancelled or aborted, all WI transactions done shall be deemed null and void.

Question 54

what is re-opening and its impact?

Answer 54

tender process whereby existing gov securities are re-opened with all existing T&C unchanged.
The announcement of re-opening is via FAST.

increase the size of an existing issue & thus improve liquidity.

Question 55

how is re-opening done?

Answer 55

done either via tender or private placement.

Question 56

what is re-opening’s tender based on and does the proceeds include interest?

Answer 56

re-opening is based on price specified.

Proceeds paid for the successful bids will include accrued interest unless the re-opening is issued on a coupon payment date.

Question 57

what is book building?

Answer 57

process whereby the issuer appoints a book runner (usually a large financial institution) to manage the book building process.

Question 58

what is the the process of book building (BB)?

Answer 58

The book runner will talk to investors to collect bids at various yields. The final price will only be determined when the book is closed. Before setting the final issue price, the book runner will evaluate the collected bids.

BB is viewed as an efficient way of price discovery.

Question 59

what is private placement?

Answer 59

offering of its debt securities directly to an individual/a small group of investors.

usually involves large banks, pension funds, mutual funds and insurance companies.