Singapore NDF probe hits market liquidity

The non-deliverable forward forex market last year fell under suspicion of the same rate-rigging that affected Libor and Sibor, and the fallout threatens to stifle liquidity and limit Asean forex hedging

As the global reach of the Libor-rigging scandal became clear, the Monetary Authority of Singapore (MAS) in July last year ordered the members of the Association of Banks in Singapore (ABS) to review how they set the Singapore interbank offered rate and the swap offer rate.

Two months later, MAS then widened the scope of the internal reviews to include the setting of the rates in the non-deliverable forward (NDF) forex contracts traded out of the city-state, ordering that the banks immediately report any irregularities uncovered and take appropriate disciplinary steps against staff involved.

What then followed was a severe shake-up of the market with reports emerging that NDF traders from banks including UBS, RBS and OCBC were either being suspended or placed on forced leave. By the end of January, it was estimated that around half of the 40 to 50 NDF traders based in Singapore had been taken out of the market.

It is understood that market liquidity has fallen significantly in the wake of the suspensions. With NDFs currently mostly over-the-counter derivatives, there are no firm figures for market sizes, but HSBC recently estimated the daily turnover in the Indonesian rupiah NDF contract – one of the most frequently traded of the Asean currencies – at between $500 million and $700 million per day. HSBC's previous estimate was a daily turnover of $700 million to $1.3 billion.

Traders still operating in the market say the drop in liquidity has come in the areas of proprietary trading and position taking from the banks, but that hedging on behalf of clients has been able to continue.

It is a fair assessment that proprietary trading and position taking has definitely reduced

"There's still plenty of liquidity for us to maintain our client offering," says one Singapore-based forex banking source.

One forex trader says this is a result of the less complex nature of most client hedging requirements. "It is a fair assessment that proprietary trading and position taking has definitely reduced," says the source. "But the liquidity offering to clients, particularly corporates, for hedging purposes has not been affected at all. A lot of traders have been put out to pasture or put on suspension, but there are still enough junior guys put on the desks who are perfectly capable of dealing with the hedging needs of corporates, which tend to be very simple transactions in very vanilla products. You don't need the senior NDF traders to be able to fulfil that obligation."

Cracking down

However, outside of Singapore steps taken by central banks and regulators in Indonesia and Malaysia threaten to adversely affect forex hedging capabilities in South-east Asia. In Malaysia, at the end of January the central bank told local market players that they could only use the domestic fixing rate as a reference for ringgit forex contracts, while the Indonesian central bank sent out a letter reminding its local banks that they were banned from participation in the offshore NDF market. in addition, Bank Indonesia expects to introduce a new market-based reference rate in April.

Central banks in the region have long been concerned about the effects of the offshore NDF market traded out of Singapore in influencing domestic forward rates and causing volatility in their currency markets. In Indonesia's case, the offshore NDF market in the rupiah sprung up in 2001 to enable traders to get around Bank Indonesia's policies limiting non-resident participation in the onshore rupiah market. The central bank released a study in April last year identifying that the NDF market was affecting the onshore market.

The effect on limiting the NDF markets will be minimal, according to the forex trader, who also believes that pressure from the central banks is unlikely to result in MAS ordering that banks abandon setting reference rates in Singapore – although there have been reports that banks are considering dropping a reference rate for the Malaysian ringgit.

"Let's say I am Bank A and I deal with Bank B on an NDF: it's up to me and Bank B what reference rate we want to use to fix the trade. It's nothing to do with the Bank of Indonesia, for example. They don't have the power to call up a private bank that's outside their jurisdiction and say ‘whenever you trade with someone, you need to use our fixing rate'," says the trader.

"They can tell their banks onshore what rate they have to use, but they can't tell anyone outside of Indonesia, while Singapore is unlikely to pass anything to harm the market here," adds the source.

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Singapore NDF probe hits market liquidity

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