MNT and foreign exchange market infrastructure

The expansion of the foreign trade surplus, together with increased foreign currency funding mobilized by banks from abroad, has given rise to a substantial structural surplus of MNT liquidity in the banking system. Since this excess liquidity carries a significant risk of stimulating consumer imports and inflationary pressures, it is essential for the central bank to absorb it through open market operations. However, relying solely on short-term CBBs for this purpose increases the central bank’s interest expenses, making it necessary to transition toward more cost-effective instruments, including reserve requirements and longer-term securities. In addition, the limited development of the secondary market for government securities and the underdeveloped market for financial derivatives used to hedge exchange rate risk continue to impair the effectiveness of the monetary policy transmission mechanism.

At present, the infrastructure of the institutions responsible for Mongolia’s capital and money markets—namely, the Bank of Mongolia, the Mongolian Central Securities Depository (MCSD), and the Mongolian Stock Exchange (MSE)—lacks interoperability. Consequently, the use of publicly traded securities in money market operations remains constrained, and market price discovery and yield curve formation are impeded, which in turn hinders the development of the long-term securities market. In addition, owing to limited opportunities to allocate excess money market liquidity to alternative market instruments, much of this liquidity remains concentrated in CBBs. Moreover, the absence of an integrated information system for the domestic foreign exchange market contributes to information asymmetry and reduced trading activity. Accordingly, it is necessary to develop an integrated information system in cooperation with the General Customs Administration (GCA), the Mongolian Tax Administration (MTA), and the Financial Regulatory Commission (FRC), while strengthening the legal framework governing foreign exchange market operations, with a view to improving market participation, increasing trading activity, and enhancing market efficiency.

In accordance with the Bank of Mongolia’s Medium-Term Strategy (2026–2030), the Bank of Mongolia shall pursue a policy of developing money and foreign exchange market infrastructure, with the objectives of enhancing the effectiveness of monetary policy transmission through financial markets and supporting the development of the foreign exchange market. Concurrently, the Bank of Mongolia shall collaborate with relevant institutions to promote the development of the derivatives market.

• Collaborate with relevant institutions to support the implementation of a centralized securities registry system: The Bank of Mongolia shall work toward integrating the registration infrastructure of the Bank of Mongolia, the MCSD, and the MSE, and shall support the development of an MNT-denominated risk-free yield curve by promoting secondary market trading in government securities.
• Develop an integrated foreign exchange market system based on best international practices: In cooperation with the FRC, the GCA, and the MTA, the Bank of Mongolia shall develop an integrated foreign exchange market system designed to assist market participants in assessing market conditions and to support the Central Bank’s decision-making.
• Promote the gradual development of financial derivatives markets through a phased implementation approach. Enhancing market transparency and upgrading trading infrastructure, in conjunction with the development of the money and foreign exchange markets, will establish the conditions necessary for a derivatives market capable of managing volatility in exchange rates, interest rates, and commodity prices. Going forward, the Bank of Mongolia shall cooperate with relevant institutions toward the introduction of derivatives on MNT–foreign currency pairs in international markets.
• Undertake the necessary preparatory work for submitting draft amendments to relevant legislation to Parliament with the aim of facilitating the efficient functioning and development of the foreign exchange market. Amendments to the Law on Currency Regulation and the Law on Settlement in National Currency are expected to enhance the efficiency and transparency of the foreign exchange market, strengthen the domestic use of the MNT, and establish a sound legal framework for managing exchange rate risk. In addition, the Bank of Mongolia shall formulate legislative proposals to improve the legal framework for derivatives, enabling banks and enterprises to hedge exchange rate risk on a market basis, and shall submit such proposals to the bodies vested with the right of legislative initiative.

Addressing the structural constraints in money market infrastructure will facilitate the formation of an MNT-denominated risk-free yield curve, establish the foundation for the accurate valuation of financial instruments, and ensure a timelier and more effective transmission of the policy rate to the real economy. Moreover, the development of the derivatives market will provide businesses with a stable environment in which to plan their expenditure without exposure to abrupt exchange rate fluctuations and will eliminate the distortion whereby the Central Bank bears the exchange rate risk of the private sector.