FORMER Bank Negara Malaysia (BNM) governor Dr Zeti Akhtar Abdul Aziz was present when rumbles of foreign exchange trading troubles began emerging.

Zeti, 70, testified to the Royal Commission on Inquiry (RCI) today that she was present during a meeting between former BNM adviser Abdul Murad Khalid and the late BNM governor Jaffar Hussein in London in June 1992. 

In May or June 1992, Zeti said Murad, who was then recently promoted to oversee the Bank Negara’s forex trading arm, had told Jaffar about some troubles with foreign exchange trading.

The meeting took place in a London apartment where Jaffar stayed. Former director of BNM’s economics department Awang Adek Hussin was also present. 

“Murad told Jaffar regarding massive exposure to BNM as a result of foreign exchange transactions. As far as I could remember, Murad did not have the details regarding the foreign exchange transactions. 

“Jaffar responded by saying that this was probably gross positions that were known by the counterparties that BNM traded with. These counterparties would not be aware of the net positions of BNM and he was of the view that the net positions were very much less.”

Zeti was secretary to the BNM board of directors before she was transferred to head the BNM London office in 1989. In 1994, she was promoted to chief economist of the central bank.

Zeti said she learnt of the full extent of the forex losses suffered by BNM between 1988 and 1994, in January 1994, when there were “news of serious concerns regarding the central bank’s reserves management. 

Zeti said she was still on duty at the London office.

“Thereafter I contacted a senior official at BNM to discover what had happened, and I was told that we had suffered significant losses in activities in the reserves management.”

“My first direct involvement in reserve management was when I was assigned to the London Representative Office, where US$200 million was allocated for the purpose of investment by the London office.” 

The London office was staffed by four dealers. Initially, the London office did not undertake any foreign exchange transactions, but was later allowed to make investment in instruments denominated in other currencies, which required foreign exchange transactions to support the investment activities and not take positions on any currencies.

After two to three years, the amount allocated to the London and New York offices were increased from US$200 million to US$500 million. It remains at that level until today. 

Zeti also revealed that as BNM deputy governor later in 2007, she directed former accounts manager at BNM, Abdul Aziz Manaf, who was the RCI’s first witness, to prepare a report regarding the accounting treatment for reserve management from 1988 to 1994.

The report is the one known as “Accountng Treatment of Losses Arising from Active Reserve Management 1988-1984 dated April 18, 2007.”

It was from this report  that Abdul Aziz concluded that the central bank suffered net losses of RM32.074 billion from 1988 to 1994, while recording a net profit of RM2.473 billion in 1990. 

The audit reports that Abdul Aziz based his findings are not publicly available, as they are reportedly classified under the Official Secrets Act (OSA).

Zeti said she had ordered the report as a new act had replaced the Central Bank of Malaysia Act 1958, and that there had been a change in the accounting treatment regarding profit and losses arising from reserve management. 

She added that BNM had taken steps to diversify its reserve composition and introduced a more “rigorous and robust risk-management system”. – September 6, 2017.