On 15 November 2024, Bank Negara Malaysia (“BNM”) announced an important liberalisation of Malaysian’s foreign exchange control rules for Multilateral Development Banks (“MDBs”) and Qualified Non-resident Development Financial Institutions (“DFIs”). MDBs are financial institutions whose membership consists of sovereign states while DFIs are financial institutions established (usually by governments) to support the development of a nation.

The liberalisation allows MDBs and DFIs to:

• issue ringgit-denominated debt securities for use in Malaysia; and
• provide ringgit financing to resident entities in Malaysia

Amendments to BNM’s Foreign Exchange Notices

BNM’s Foreign Exchange Notice Nos. 2 and 5 have been amended to facilitate the foreign exchange control liberalisations.

The amendments are aimed at facilitating participation by MDBs and DFIs in the Ringgit debt market and financing of investments in key growth areas in Malaysia.

Impact of Foreign Exchange Control Liberalisations

BNM has traditionally regulated the Ringgit debt markets by limiting the ability to lend in Ringgit primarily to 50+ licensed onshore banks, investment banks and development financial institutions in Malaysia.

With the easing of the foreign exchange rules, international MDBs and Qualified DFIs can now borrow in Ringgit by issuing Ringgit debt securities (both conventional bonds and Islamic sukuks) in any amount. This gives another avenue for MDBs and Qualified DFIs to source for Ringgit liquidity, which may be used by such financing institutions to provide Malaysian customers financing facilities denominated in Ringgit, without BNM’s prior approval.

This liberalisation allows MDBs and Qualified DFIs to tap Malaysia’s robust Ringgit bond and sukuk market to raise Ringgit financing with Malaysia’s Islamic securities market being the largest globally. Additionally, it opens up another avenue of Ringgit financing for Malaysian residents, potentially  benefitting major infrastructure projects in Malaysia through the availability of Ringgit financing from international financiers for domestic projects.

If you have any questions or require any additional information, please contact  Loo Tatt King or the partner you usually deal with in Zaid Ibrahim & Co. (in association with KPMG Law).

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

‍Introduction

Following the LIBOR scandal in 2012, many countries and financial centers have taken steps to transition their benchmark interest rates from Interbank Offered Rates (IBOR) to more objective Risk-Free Rates (RFR). IBOR rates are generally set by a rate setting body, to which financial institutions would submit the interest rates which such financial institutions have agreed (or theoretically agree) to lend to one another, for collation, setting and publication by the rate setting body.

Generally, RFR are set based on data on interest rates that are transacted in an open and liquid financial market, derived from actual financing and derivatives transactions. For such reason, RFR are generally seen to be more robust, more reflective of the actual market, and less susceptible to manipulation.

BNM Discussion Paper on KLIBOR Transition

On 27 September 2024, Bank Negara Malaysia (BNM) issued a Discussion Paper on the proposed full transition from the Kuala Lumpur Interbank Offered Rate (KLIBOR) to the Malaysian Overnight Rate (MYOR) and Malaysian Islamic Overnight Rate (MYOR-i), and the cessation of KLIBOR.

The issuance of the Discussion Paper marks the first public concrete step taken by BNM to transition Malaysia’s interest rate benchmark from KLIBOR, which has been the benchmark for Malaysian interbank lending rates since 1987, to MYOR/MYOR-i, which promises to be a more robust benchmark. MYOR is the volume-weighted average rate of unsecured overnight Ringgit interbank transactions. It was introduced by BNM in 2021 and has been quoted in parallel with KLIBOR since its introduction.

The transition from KLIBOR to MYOR/MYOR-i mirrors developments which have been taking place over the past decade in major financial centers around the world, such as:

• In the United Kingdom, LIBOR has ceased to be used since 2023. Banks have largely transitioned to RFR such as the Secured Overnight Financing Rate (SOFR) and Sterling Overnight Index Average (SONIA).
• In the United States, LIBOR has ceased to be used since 2023 and the main US Dollar interest rate benchmark is now the SOFR.
• In Singapore, the Singapore Interbank Offered Rate (SIBOR) will be discontinued by 31 December 2024 and be taken over by the Singapore Overnight Rate Average (SORA).

Proposed Timeline for KLIBOR Transition – a 3-year Roadmap

The Discussion Paper proposes a 3-year roadmap, to allow ample opportunity for Malaysian market participants to prepare for and support the transition to new financial products referencing MYOR/MYOR-i, with actual cessation of KLIBOR in 2028.

During the 3-year transition, market participants who continue to enter into KLIBOR transactions should draft appropriate transition provisions and fallback positions into their contracts, to take into account the impending cessation of KLIBOR.

Legacy KLIBOR Transactions and Contracts

Legacy contracts are transactions and contracts that reference an KLIBOR which extend past the KLIBOR cessation date. Effective management of these transactions and contracts are crucial to mitigate market disruption in the event of KLIBOR’s cessation.

The Discussion Paper sets out two main approaches to address legacy transactions and contracts:

• Active transition – where the parties actively amend legacy contracts to switch the reference away from KLIBOR to MYOR/MYOR-i ahead on the cessation date.
• Fallback provisions – where parties find difficulty in implementing active transitions, fallback provisions may be incorporated into legacy contracts. Fallback provisions govern scenarios where an IBOR has permanently ceased. Generally, fallback provisions specify the trigger event, the replacement rate and the adjustments needed to address the structural difference between the replacement rate and the IBOR. Fallback provisions will only apply following the actual cessation of an IBOR.

Feedback Deadlines

Market participants may submit feedback on the Discussion Paper to BNM electronically, by no later than 27 October 2024, using the hyperlinks set out in the Discussion Paper, which may be accessed here.

Conclusion

Sufficient and timely efforts by market participants are crucial to manage the risks of the transition from KLIBOR to LIBOR.

Malaysia has the advantage of observing IBOR transition processes in other jurisdictions such as the United Kingdom, United States, Singapore, Hong Kong and Japan. Hopefully, this will ease the transition process as many of the issues would have been fleshed out and dealt with in those jurisdictions.

The KLIBOR transition process will not only involve banks and financial institutions, but also their customers and borrowers. It is expected that the banks and financial institutions would normally take the lead in the transition process, but customers and borrowers (especially those that have large financing facilities and derivatives transactions pegged to KLIBOR) will have vital roles to play as well.

Based on the experience from other jurisdictions, these are the general steps which market participants have to go through when faced with a potential cessation of KLIBOR:

1. Understand the regulatory changes and their impact on outstanding financing and derivatives contracts and transactions;
2. Review all outstanding financing and derivatives contracts and determine the best way to transition from KLIBOR;
3. Formulate an implementation plan to amend all outstanding KLIBOR-denominated contracts and transactions;
4. Identify the group companies and entities which would be affected by the implementation plan;
5. Identify the counterparties to such contracts and transactions;
6. Negotiate the revised contracts and transactions with the identified counterparties; and
7. Identify, amend and upgrade (where necessary) all affected systems and processes, which may include IT, accounting, compliance and other systems and processes.

There would also be tax, accounting and legal issues to consider. Early involvement of the market participant’s lawyers and legal departments in the KLIBOR transition process would be critical in preventing disputes, by ensuring all terms are clear and compliant with regulatory standards.

If you have any questions or require any additional information, please contact  Loo Tatt King or the partner you usually deal with in Zaid Ibrahim & Co. (in association with KPMG Law).

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

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Stamp duties are taxes levied on legal instruments, used by most governments to raise revenue. Usually, stamp duty laws are dry and boring with most amendments affecting only the amounts of revenue raised by governments from instruments chargeable with stamp duty.

Recently the Malaysian Stamp Act 1949 (“Stamp Act”) was amended by the Finance (No. 2) Bill 2023, passed during the second reading in Parliament on 13 December 2023. The proposed amendments are expected to come into force on 1 January 2024.

Updating of the Stamp Act

The amendments mostly update the Stamp Act for modern day stamp duty practice by removing references to adhesive stamps, postal franking and digital franking machines. More importantly the amendments give legal recognition to electronic instruments for the purposes of liability for stamp duty. This mean that stamp duty will only be payable electronically, and evidence of payment of stamp duty would be generated electronically. The use of adhesive stamps and franking machines have been and will be gradually phased out.

The current practice for submission for adjudication can generally only be done online on the Lembaga Hasil Dalam Negeri’s STAMPS website, with drop down boxes for selection of the relevant provision for the final dutiable amount. Long gone were the days when physical submission of documents involved verbal explanation, and to a certain extent convincing officers, on the basis of stamping under certain provisions of the Stamp Act.

Definitions of “writing” and “written” and removal of ceiling for foreign currency denominated loans and financings

This article addresses two specific amendments which may change the practice of banks and their customers in Malaysia with regards to cross-border foreign currency denominated loans and financings.

These amendments are: ‍‍

a) Deletion of the RM2,000 ceiling for foreign currency denominated loans and financing documents

This deletion equalizes the stamp duty payable between Ringgit denominated and foreign currency denominated loans and financings.

‍b) Definition of “written” and “writing” to include electronic documents

Stamp duty on a stampable document executed outside Malaysia is payable within 30 days after the document is first received in Malaysia. With the introduction of the definition of “writing” and “written”, defined to include “any record or transmission which is in electronically readable form”, scanned PDF copies of loan and security documents are technically stampable instruments.

Practical effect of the amendments on international cross border financings

International financings normally involve multiple jurisdictions and loan and security documents being executed and sent across borders.

The net effect of these two amendments are that any loan or financing document, although executed outside Malaysia and denominated in foreign currency, when is sent to Malaysia in electronic form (e.g. by email, or made available for download from a cloud storage), it would be subject to ad valorem stamp duty at the rate of 0.5% of the amount of the loan, payable within 30 days of the loan or security document first being received into Malaysia.

Typically, a Malaysian party to such a transaction would receive the original documents for stamping a few days or weeks after the documents have been signed. The 30-day time period starts running only after the original document is received in Malaysia. There may be days, weeks or even months between the signing of the loan and security documents and the actual drawdown of the loan or financing facility. With the amendments to the Stamp Act, sending a PDF copy of the signed loan or security documents to a Malaysian recipient would start the 30-day clock running.

The net effect of the amendments would be to increase the amount and speed up the collection of stamp duty on loan and security documents executed outside Malaysia, which is probably net positive for the government’s coffers.

Lawyers and bankers would need to be more vigilant the moment the loan and security documents are executed. They must be aware that scanned copies of documents circulated to parties to the transaction may attract Malaysian stamp duty liability when they are sent by email to or made available for download by a Malaysian party.

If you have any questions or require any additional information, please contact Loo Tatt King, Kellie Allison Yap or the partner you usually deal with in Zaid Ibrahim & Co. (in association with KPMG Law).

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