19 December 2019
On 12 November 2019, Bank Negara Malaysia (“BNM”) issued a policy document titled “Repurchase agreement transactions”. It became effective on that date.
The policy document seeks to:
- set out the scope of repurchase agreement (“Repo”) transactions that can be conducted by licensed banks and licensed investment banks;
- set out regulatory requirements and BNM’s expectations in relation to Repo transactions entered into by licensed banks and licensed investment banks; and
- promote sound risk management practices by licensed banks and licensed investment banks for the conduct of Repo transactions.
The policy document is applicable to all market participants that are licensed banks and licensed investment banks, and does not apply to Repo transactions entered into by overseas branches of licensed banks and licensed investment banks and Repo transactions entered into with BNM. It is applicable to Repo transactions involving Ringgit and non-Ringgit Repo Securities and reverse Repo transactions including any outright sale or purchase of Repo Securities with an intention to repurchase or resell these Repo Securities at a future date. Repo Securities refers to the underlying securities in the Repo transaction. The substance of a transaction prevails over its form in determining whether a transaction is governed under this policy document.
Generally, the policy document provides as follows:
- The conduct of Repo transactions must be in line with the principle of professionalism and integrity, as outlined under the Principles for a Fair and Effective Financial Market for the Malaysian Financial Market issued by BNM in order for the Repo market to operate in a sound and orderly manner.
- Licensed banks and licensed investment banks must not in any circumstances enter into Repo transactions which limit the availability of Repo Securities with the intention of creating a false and distorted market in Repo and the Repo Securities.
- At least one principal to a Repo transaction must be a licensed bank or licensed investment bank.
- The legal ownership of the Repo Securities must be transferred for all Repo transactions.
- The maximum tenor of a Repo transaction is five years.
- The standard lot for an inter-bank Ringgit Repo is MYR10 million. Repo transactions involving non-Ringgit may observe the standard lot or minimum market lots practised in the relevant markets of such currency. Licensed banks and licensed investment banks who wish to transact a Repo for a different amount may specify the amount when requesting for, or providing, quotes.
- Prior to undertaking Repo transactions, licensed banks and licensed investment banks must ensure that:
- only dealers duly authorised by the licensed banks and licensed investment banks can undertake Repo transactions;
- a list of authorised dealers is maintained and updated from time to time;
- policies, procedures and internal controls are established to ensure that any Repo transactions including the selection of the underlying Repo Securities have been properly authorised; and
- infrastructures are put in place to support the Repo transactions including systems for securities valuation and management, credit control, risk management and record keeping.