Investment in local currency bonds by cross-border investors may be limited to those who are prepared to live with the limited reliability of NDFs in hedging foreign exchange risks. It follows from this that improving access for derivative instruments could significantly increase the willingness of foreign investors to buy local currency bonds. To improve the diversity and liquidity of the foreign exchange derivatives market, the study recommends integrating onshore and offshore markets. In particular, it suggests relaxing limits on foreign portfolio investors’ cash balances and borrowings; easing rules on foreign investors using onshore markets to hedge foreign exchange risks; and liberalizing domestic banks’ participation in offshore foreign exchange and NDF markets. The study says the five countries should also look at making sure sufficient US dollars are available for bond investors when they exit the market; allowing delivery of offshore foreign exchange... — blogs.adb.org/blog