Regulated Short-Selling of Securities in the Wholesale Money Market

The regulated short-selling framework for Malaysian Government Securities (MGS) and Malaysian Government Investment Issue (MGII) is applicable to all resident entities to achieve the following benefits:
(a) facilitate market making activities for Principal Dealers and Islamic Principal Dealers;
(b) facilitate portfolio hedging; and
(c) promote repo, securities lending activities and SBBA transactions to enhance potential return.
By allowing this flexibility, liquidity of the bond and sukuk markets will also be enhanced, facilitating a better price discovery process and correction of any pricing anomalies.

This policy document aims to promote sound risk management practices by the Eligible Market Participants, particularly market risk and settlement risk for the conduct of short-selling transactions.

This policy document reflects the ruling of the Bank’s Shariah Advisory Council (the SAC) during the SAC’s 177th Meeting on 20th June 2017. The SAC ruled that the concept and mechanism that give similar effect of regulated short-selling using MGII is permissible, subject to the following:
(a) it is structured based on bilateral binding promise (muwa`adah mulzimah) concept to execute the sale contract of MGII in the future;
(b) in the event that the promisor failed to fulfil the promise, the promise has a right to claim only actual loss suffered; and
(c) the delivery of MGII and its counter-value shall take place on the agreed contract date.

This policy document applies only to short-selling transactions involving the Eligible Securities in the wholesale money market and does not apply to “When Issued Trade”. “When Issued Trade” is permitted and subject to the Participation and Operation Rules for Payments and Securities Services issued by PayNet.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking