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Jochen M. Schmittmann

markets. Other countries retain more restrictions, with Malaysia taking some of the strongest policy measures to limit ringgit trading to onshore markets. Indonesia introduced a domestic version of NDFs (DNDFs), settled in local currency, as an alternative to USD-settled offshore NDFs. Section III surveys the range of policy approaches to NDF markets in Asia and section VI discusses DNDFs. The question of pricing relationships between NDFs and onshore FX markets is an empirical one. 5 In section V , we analyze pricing relations for the Asian currencies with the

Jochen M. Schmittmann

Front Matter Page Asia and Pacific Department Contents Abbreviations I. Introduction II. The Size of NDF Markets in Asian Currencies III. Policy Approaches to NDF Markets IV. Volatility and Pricing of Onshore Forwards and Offshore NDFs V. Price Linkages Between Onshore and Offshore Currency Markets A. Empirical Approach and Data B. Results C. Price Linkages During the COVID-19 Pandemic VI. Domestic Non-Deliverable Forwards (DNDFs) VII. Conclusion References Appendix 1: Realized volatility of onshore forwards and NDFs

Jochen M. Schmittmann
Non-deliverable forward (NDF) markets in many Asian emerging market currencies are large, rapidly growing, and often exceed onshore markets in transaction volume. NDFs tend to price significant depreciation during market stress episodes including COVID-19. Spillovers from NDFs to onshore markets are a policymaker concern. Our analysis shows that influences tend to run both ways after controlling for differences in timezones between markets. For the COVID-19 pandemic there is some evidence of NDFs leading onshore markets for a few currencies. Policy approaches to NDFs vary widely across Asia from close integration with onshore markets to severe restrictions on NDF trading.
International Monetary Fund. Asia and Pacific Dept

outstanding stock of FX Swaps (DNDF) was US$1.5 (3.8) billion at end 2020:Q3, with total issuance of US$123 (58) billion. The average daily issuance for FX swaps and DNDF is US$290 million and US$98 million, respectively. This together represents about 17 percent of the onshore FX swap and outright forward market turnover respectively. 6 Table 1. Indonesia: Overview of Bank Indonesia FX Instruments Instrument Mechanism Effects Other Countries Liquidity ER Vatue/Votatitity Reserves Hedge FX Spot Sell (buy) FX spot FX

International Monetary Fund. Western Hemisphere Dept.

) Sources: Central Bank of Brazil; CEIC; and Fund staff calculations. Figure 3. Cupom Cambial, FX Rate, and FX Swap (In percent and billions of U.S. dollar) Sources: Central Bank of Brazil; Bloomberg; and Fund staff calculations. Figure 4. Convertibility Risk (Difference between offshore NDF and onshore NDF (DNDF), in percent of DNDF, annualized) Sources: Bloomberg and Fund staff calculations. B. Intervention Tool Kit 3. Sterilized intervention in spot markets is one instrument at the disposal of the BCB but by no means the only one

International Monetary Fund. Asia and Pacific Dept

ensure that the current trend of digitalization develops within a conducive digital economic and financial ecosystem, along the lines of Bali Fintech Agenda. Financial Market Deepening (FMD) In 2018, the FMD policy was focused on improving the efficiency of money and forex markets to lay the foundation for promoting long-term economic financing . BI has taken several actions by introducing domestic non-deliverable forward (DNDF) transaction, developing market for call spread options (CSOs), establishing Indonesia Overnight Index Average (IndONIA) as a

International Monetary Fund. Asia and Pacific Dept

requirement and monetary expansion by buying government bonds in the secondary market. Amidst global financial market uncertainties, exchange rate stabilization policy has been adopted such that the value of the Rupiah is in line with its fundamentals and market mechanism. Stabilization policy to manage excessive volatility was undertaken through a ‘triple intervention’ via outright buying and selling of foreign exchange in the spot market, Domestic Non-Deliverable Forward (DNDF), and purchases of SBN from the secondary market. In accordance with Law No.2 of 2020, the

International Monetary Fund. Asia and Pacific Dept

introduction of a 7-day reverse repo rate and a narrowing of the interest rate corridor in August 2016, BI gradually introduced reserve requirement averaging starting in July 2017. These actions contributed to the interbank rate moving closer to the policy rate. Building on this, averaging should be extended to cover all primary reserve requirements. BI introduced DNDFs in November 2018 to enhance hedging opportunities and has started auctioning its securities across the yield curve to encourage price discovery. 8 24. The authorities seek to facilitate a private sector

International Monetary Fund. Asia and Pacific Dept

-deliverable forward (DNDF) market in 2018 provided an additional channel to counter excessive volatility in the FX market. This framework has served Indonesia well, contributing to stable inflation and credit growth in the run up to the pandemic while allowing the exchange rate to be market-determined. 5. At the beginning of the pandemic, BI’s policy response largely relied on conventional policy tools to provide liquidity . The COVID-19 crisis began to intensify in Indonesia and other EMs around February 2020, triggering large capital outflows, a spike in risk premia, and large