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Jochen M. Schmittmann

influence between NDFs and onshore currency markets. NDFs are foreign exchange forward contracts that do not require physical delivery of the underlying currencies. Transactions are cash-settled, typically in US dollar, through net payments that are equivalent to the difference between the spot rate at the maturity date and the previously agreed forward rate. NDFs trade over-the-counter, rather than on exchanges, in major financial centers outside the jurisdiction of the authorities of the corresponding currencies. 2 NDF markets developed in response to restrictions

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.
Roberto Benelli

inserting a wedge between the two, this should be evident in interest rate spreads. If the new regulations eliminate arbitrage, or impose a cost of arbitrage between domestic and offshore markets, then there should be a difference between the implied interest rate in reais available offshore through the NDF market and the interest rate in reais available onshore in Brazil. The implied interest rate in reais should be lower offshore, where the IOF cannot be collected. The basis spread derived from NDF trading should become negative, entailing a lower

Mr. Jacob Gyntelberg, Mr. Subhanij Tientip, and Mr. Mico Loretan

limit) and to maintain a net overall FX position across all foreign currencies of no more than 20% of capital (aggregate currency limit) at the end of each day. Dealers usually manage to adhere to these limits by conducting transactions in the FX swaps markets. The position limits tend to be particularly important for the branches of foreign banks that operate in Thailand. The BOT discourages nondeliverable forward (NDF) trading activity involving Thai baht and has asked onshore financial institutions not to participate in the offshore NDF market. All licensed FX

Mr. Jacob Gyntelberg, Mr. Subhanij Tientip, and Mr. Mico Loretan
We present empirical evidence that the Thai baht’s value is driven in part by investors’ cross-border equity portfolio rebalancing decisions. Our results are based on comprehensive datasets of FX and stock market transactions undertaken by nonresident investors in Thailand in 2005 and 2006. Higher returns in the stock market relative to a reference stock market are associated with net sales of equities by these investors and a depreciation of the Thai baht. Net purchases of Thai equities lead to an appreciation of the Thai baht. Foreign investors do not appear to hedge the foreign exchange risk related to their stock market positions.
Sylwia Nowak, Mr. Sanjaya P Panth, Mr. Ravi Balakrishnan, and Mr. Yiqun Wu

concerned that high frequency onshore and NDF trading were mostly driven by speculators, leading to excessive volatility in the exchange rate . The central bank, therefore, sought to limit local banks’ capacity to provide liquidity to NDF markets, including by discouraging nonresident deposits by imposing punitive reserve requirements. Volatility, however, rose in late 2010 and early 2011, with foreign exchange (FX) market turnover and inbound remittances for investment purposes remaining high. Apart from the measures discussed above, which are aimed at stemming certain

Mr. Jack J Ree, Mr. Kyoungsoo Yoon, and Mr. Hail Park

billions of U.S. dollars, Index) Source: CEIC and IMF staff estimates. Korea: Market Forecasts of KRW (Won per U.S. dollars) Source: Shin and Jang (2006) . Note: Forecasts as of March 22, 2006. Market infrastructure The Korean FX market has grown significantly in its size in part led by onshore swap and offshore NDF trading. Despite this, latest BIS data show that the share in trading of the won in the global FX markets still falls below what would be in line with the size of Korea’s nominal GDP ( Figure 8 ). Combined by expectations of

Mahmood Pradhan, Mr. Ravi Balakrishnan, Reza Baqir, Mr. Geoffrey M Heenan, Sylwia Nowak, Ceyda Oner, and Mr. Sanjaya P Panth

—Curbing Currency Speculation Taiwan Province of China has taken a range of measures aimed at reducing speculation in its foreign exchange markets. The authorities have been concerned that high-frequency onshore and NDF trading were driven mainly by speculators and led to excessive volatility. Since NDF markets are settled in U.S. dollars, there is little that the central bank can do to control offshore market behavior. Instead, the central bank focused on reducing local banks’ foreign exchange positions in both onshore and NDF markets, including discouraging nonresident

Sylwia Nowak, Mr. Sanjaya P Panth, Mr. Ravi Balakrishnan, and Mr. Yiqun Wu
Net capital flows to emerging Asia rebounded at a record pace following the global financial crisis, raising concerns about overheating and financial stability. This paper documents the size and composition of the most recent surge to Asian emerging markets from a historical perspective and compares developments in the broader economy, asset prices, and corporate variables across the different episodes of strong inflows. We find little evidence of a significant build-up of imbalances and resource misallocation during the most recent surge. We also review country experiences in managing the risks associated with inflows and argue that Asian countries have used regulatory measures during past surges, although there is not strong evidence of their efficacy without supporting monetary and fiscal policies.