Currency Exchange: Harmonised Local Currency Transaction Framework Enhances Cross-Border Trade in ASEAN

The Bank of Thailand (BOT), Bank Indonesia (BI), and Bank Negara Malaysia (BNM) have taken a significant step toward strengthening regional economic integration by adopting the harmonized Local Currency Transaction Framework Operational Guidelines (LCTF OG) and expanding the scope of eligible cross-border transactions under the framework. This initiative aims to promote the use of local currencies in trade and investment, mitigate exchange rate risks, and enhance efficiency in cross-border transactions.

The harmonized LCTF OG consolidates previously established bilateral guidelines between the three countries, creating a unified standard that ensures consistency, scalability, and transparency for participating financial institutions and their users. By streamlining processes and accommodating specific regulatory requirements of each jurisdiction, the framework provides a robust foundation for facilitating local currency transactions across Thailand, Indonesia, and Malaysia.

A key feature of the updated framework is the inclusion of portfolio investments as eligible underlying transactions, alongside trade in goods and services and direct investments. This expansion offers investors greater opportunities to conduct transactions in local currencies, reducing their exposure to exchange rate volatility and fostering deeper regional financial integration.

To support the expanded framework, BOT, BI, and BNM are inviting additional qualified commercial banks to participate in the LCTF. These banks, leveraging their expertise, operational capabilities, and cross-border networks, will play a pivotal role in facilitating local currency transactions and driving the adoption of the framework.

Since the initial implementation of the LCTF, Thailand, Indonesia, and Malaysia have observed a steady increase in local currency transactions for bilateral trade. The harmonized framework is expected to further enhance cross-border transaction options for businesses, reaffirming the commitment of the three countries to promote the use of local currencies in regional trade and investment.

Background: Promoting Local Currency Usage in ASEAN

The BOT, in collaboration with BI and BNM, has long recognized the strategic importance of local currency transactions in mitigating exchange rate risks and fostering economic stability. The Local Currency Settlement Framework, initiated under the BOT’s 2017-2019 international connectivity plan, laid the groundwork for this effort. The framework was further advanced through the Indonesia-Malaysia-Thailand Framework for Cooperation on Local Currency Transactions, formalized via three memorandums of understanding (MoUs) signed in August 2023.

In February 2025, the three central banks officially announced the adoption of the harmonized LCTF OG, marking a milestone in regional financial cooperation. The framework is designed to address the challenges of exchange rate volatility by providing businesses with a reliable mechanism to conduct transactions in local currencies.

Key Features of the LCTF OG:

1. Standardization: The framework unifies existing bilateral guidelines into a single set of operational standards, ensuring consistency and clarity for all participants.
2. Enhanced Efficiency and Transparency: Streamlined processes reduce transaction complexities, improving efficiency and transparency for businesses and financial institutions.
3. Flexibility for Local Regulations: While establishing common guidelines, the framework allows each country to adapt the rules to align with its specific legal and regulatory requirements.
4. Expanded Transaction Scope: In addition to trade in goods and services and direct investments, the framework now includes portfolio investments, broadening the range of eligible transactions.
5. Facilitation for Commercial Banks: The framework simplifies criteria for Appointed Cross Currency Dealers (ACCDs), enabling qualified commercial banks to play a more active role in facilitating local currency transactions.

Expected Outcomes:

The harmonized LCTF OG is expected to deliver several benefits, including:

• Increased Convenience and Efficiency: Businesses will experience smoother and faster cross-border transactions using local currencies.
• Reduced Exchange Rate Risks: By minimizing reliance on major currencies like the US dollar, businesses can better manage currency volatility.
• Enhanced Regional Trade and Investment: The framework will stimulate economic activity within ASEAN by encouraging the use of local currencies in trade and investment.

Current Status and Future Prospects:

As of now, the LCTF OG is operational among qualified commercial banks and the central banks of Thailand, Indonesia, and Malaysia. While the framework remains an internal matter for the participating institutions, the central banks are actively encouraging more qualified commercial banks to join and support its expansion. This collaborative effort underscores the commitment of BOT, BI, and BNM to fostering regional economic resilience and integration.

Conclusion:

The adoption of the harmonized LCTF OG represents a significant advancement in promoting the use of local currencies for cross-border transactions in ASEAN. By standardizing processes, enhancing transparency, and expanding the scope of eligible transactions, the framework provides businesses with a powerful tool to mitigate exchange rate risks and streamline international trade. As Thailand, Indonesia, and Malaysia continue to lead this initiative, the LCTF OG is poised to play a pivotal role in driving regional economic growth and strengthening financial cooperation within ASEAN.