22 May 2020
Malaysia

Bank Negara Malaysia (“BNM”) has issued new Foreign Exchange Notices (“FX Notices”) dated 30 April 2020, which take effect from the same date. The new FX Notices are aimed at improving business efficiency and providing flexibility to individuals and corporates to better manage their foreign exchange risk exposures. The new FX Notices revoke the previous FX Notices that have been in effect since 30 June 2013, and consolidate all the Supplementary FX Notices Nos. 1 to 6, which were issued from December 2016 to August 2019.

BNM regulates Malaysia’s foreign exchange laws via FX Notices, which are issued pursuant to the Financial Services Act 2013 (“FSA”), and therefore have the force of law. The FX Notices apply to all dealings in Malaysian Ringgit and foreign currency, between and amongst Malaysian residents and non-residents. Transactions regulated by FX Notices include the sale, purchase, payment, transfer, remittance, borrowing, lending and guarantees involving Ringgit and foreign currency. The FSA also extends BNM’s regulatory jurisdiction over foreign exchange transactions to non-residents of Malaysia, and in respect of acts performed outside Malaysia.

This article seeks to highlight some of the key changes brought about by the new FX Notices.  It is not exhaustive.

Summary of material changes in the FX Notices

Preamble and InterpretationThe new Preamble and Interpretation section consolidates technical terms and definitions under the previous FX notices and the various Supplementary FX Notices into one section, for ease of reference.

The following changes and practical implications are particularly noteworthy:

  •  “Financial guarantee” is now defined as “any guarantee, indemnity or undertaking to secure repayment of a Borrowing”. The previous FX Notices defined “financial guarantee” as “a guarantee or any form of undertaking to secure the repayment of a debt or liability”. The wide scope of the phrase “debt or liability” gave rise to many queries to BNM on whether a particular obligation to repay monies due from another person was a “financial guarantee”. The removal of the phrase “debt or liability” and its replacement with a defined term “a Borrowing”, gives certainty to the definition of a “financial guarantee”. This is because certain debt obligations such as factoring agreements and operational leases are excluded from the definition of a “Borrowing”. It is now clear that guarantees to secure payment obligations under factoring facilities and operational leases are outside the definition of “financial guarantees”.
  • A new term “Foreign Currency Asset”, which is defined as including “Foreign Currency Asset Offshore” and “Foreign Currency Asset Onshore” replaces the terms “Investment Abroad” and “Foreign Currency Denominated Asset” which were in the previous FX Notices.
  • “Non-resident Financial Institutions” (“NRFI”) is now a defined term and it covers “Non-Resident Entities undertaking financial services, including custodian bank and trust bank”. The use of the word “entities” means that NRFIs would cover all entities providing financial services, not just limited to “banks”.
FX Notice 1: Dealings in Currency, Gold and Other Precious MetalsA material change in FX Notice 1 is the flexibility granted to all Malaysian residents to hedge their foreign currency loan obligations up to the underlying tenure of the foreign currency exposure, and cancel hedging positions in response to changing market conditions. Under the previous FX Notices, this flexibility applied only to resident institutional investors registered with BNM under the hedging framework.

The new FX Notice 1 expressly regulates NRFIs, purchasing and selling foreign currency against Ringgit when the NRFI is:

(a) acting on behalf of a Non-Resident Client; and

(b) acting as a custodian or trustee managing Ringgit Assets for its Resident or Non-Resident client with Malaysian Ringgit Assets.

FX Notice 2: Borrowing, Lending and GuaranteeA material amendment in the new FX Notice 2 is that a non-bank Malaysian resident may freely extend financial guarantees in favour of non-residents, and obtain financial guarantees from non-residents, other than in two limited circumstances. The requirements for prior approval and registration of financial guarantees above the threshold of RM50 million (or its equivalent in foreign currencies) have been removed. Residents have to only submit an annual report on the status of the financial guarantees issued to or on behalf of non-residents to BNM’s Data and Statistics Management Department.

BNM’s approvals may still be required for financial guarantees in two limited circumstances:

Financial guarantees that are issued to secure foreign currency borrowings obtained by a non-resident special purpose vehicle (SPV) from any person which is not related to the resident guarantor.

In these circumstances, the residents’ foreign currency borrowing limits in FX Notice 2 would apply.

Financial guarantees that are issued to secure foreign currency borrowings obtained by a non-resident, where the borrowings will be repaid by a resident (other than when the financial guarantees are called upon under the event of default).

In these circumstances, the residents’ “investment abroad” limits in FX Notice 3 would apply.

 

FX Notice 3: Investment in Foreign Currency AssetThe provisions of the previous FX Notice 3 have been substantially incorporated in the new FX Notice 3. The terms “investment abroad” and “investment in foreign currency assets” have been updated to “Foreign Currency Assets”, which comprises the defined terms “Foreign Currency Assets Offshore” for investments in assets outside Malaysia, and “Foreign Currency Assets Onshore” for investments in assets in Malaysia that are denominated in foreign currency. With this amendment, the provisions of the new FX Notice 3 are much clearer.

One material change for FX Notice 3 is in Paragraph 2(b), which states that there is no limit in the amount that a Resident Individual, sole proprietorship or General Partnership with Domestic Ringgit Borrowing may invest in a Foreign Currency Asset in the form of real estate outside Malaysia, if the investment is for the purpose of:

(a) education;

(b) employment; or

(c) migration.

The footnote to Paragraph 2(b) of FX Notice 3, provides that the real estate must be for the Resident Individual’s own accommodation only or the Resident Individual’s Immediate Family Member’s accommodation only. The FX Notices defines “Immediate Family Member” as the legal spouse, parent, legitimate child (including legally adopted) or legitimate sibling of an individual.

FX Notice 4: Payment and ReceiptThe new FX Notice 4 incorporates substantially the provisions of the previous FX Notice 4 and the drafting of the various provisions are much clearer. The new FX Notice 4 has express provisions regulating payments and receipts:

(a) by a NRFI on behalf of its Non-Resident clients in facilitating settlement of international trade in goods or services;

(b) by a Non-Resident Intermediary and an NRFI acting as custodians or trustees on behalf of its resident and non-resident clients; and

(c) by a Non-Resident Intermediary or NRFI acting as a custodian or trustee managing Ringgit Assets for its clients.

FX Notice 5: Securities and Financial InstrumentsThe new FX Notice 5 incorporates substantially the provisions of the previous FX Notice 5 and the drafting of the various provisions are much clearer. The material amendments in the new FX Notice 5 includes:

(a) permission for a Resident licensed insurer or takaful operator to issue or offer an insurance product or a takaful product involving or linked to a Financial Instrument denominated in Malaysian Ringgit to a Non-Resident; and

(b) both Residents and Non-Residents are allowed to subscribe for, as well as transfer, a security or Financial Instrument issued or offered in accordance with the new FX Notice 5. Previously, the permission referred to only a transfer. This express allowance is subject to compliance with FX Notice 4, in addition to FX Notice 2 and FX Notice 3.

FX Notice 6: Import and Export of CurrencyThere are no material changes in the new FX Notice 6. The Notice on Import and Export of Currencies, Securities, Islamic Securities, Financial Instruments and Islamic Financial Instruments 2013, which was issued and gazetted by BNM on 7 November 2013 and effective on 2 December 2013, has been incorporated into FX Notice 6 as an Appendix.
FX Notice 7: Export of GoodsThe new FX Notice 7 gives Malaysian exporters flexibility in the treatment of their export proceeds. Exporters may:

  • Retain up to the equivalent of RM200,000 in export proceeds in foreign currency. Previously, exporters had to convert the entire export proceeds that the exporters receive into Malaysian Ringgit.
  • Receive export proceeds up to 24 months from the date of shipment where the amount of export proceeds does not exceed RM200,000 equivalent per invoice, if, inter alia, the exporter has no control over the delay in the receipt of export proceeds. Under the previous FX Notice 7, the deadline was six months.

The new FX Notices can be found here.

In addition to the new FX Notices, BNM has also issued two explanatory documents on the new FX Policies:

Commentary

It would be beyond the scope of this article to highlight every change that the new FX Notices have made to the exchange control laws of Malaysia.

Different businesses have different foreign exchange requirements and manage their foreign exchange exposures differently. Hence, the impact of these changes on businesses will be unique to each type of business. For example, foreign currency borrowing limits from non-residents may be irrelevant to a company that sources its foreign currency funding internally or from resident lenders. An exporter that receives export proceeds in foreign currency may be impacted by changes in foreign currency hedging rules differently from an importer that needs to access foreign currency to pay foreign suppliers.

Malaysia’s economy has always been relatively open and dependent on foreign trade and investments and is part of the global supply chain networks in goods and services. Foreign multi-national corporations with subsidiaries and operations in Malaysia have a substantial presence in the Malaysian economy. Over the years, Malaysia has fine-tuned its exchange control laws to suit the requirements of its economy – tightening the exchange controls in times of economic or currency crisis, and liberalising the controls gradually to support its growing economy. The new FX Notices should give greater certainty for Malaysian businesses that are part of the global economy, and for foreign businesses having substantial dealings with Malaysia.

If you have any queries on the new FX Notices or anything about foreign exchange laws in Malaysia, please do not hesitate to contact our Banking & Finance and Debt Capital Markets & Structured Products partners:

  1. Lilian Liew
  2. Chin Sook Kwan
  3. Loo Tatt King
  4. David Lee
  5. Chow Wan San
  6. Yong Wee Hoo

This alert is for general information only and is not a substitute for legal advice.