SE Asia central banks seek overhaul of FX forward rates from Singapore

Last Updated: Thu, Feb 07, 2013 05:17 hrs

By Rachel Armstrong and Adriana Nina Kusuma

SINGAPORE/JAKARTA (Reuters) - Southeast Asian central banks are in talks to overhaul the way reference rates for offshore currency derivatives are set following investigations by banks in Singapore that found traders in the city-state tried to manipulate the market, the president of Indonesia's foreign exchange industry group said.

The discussions show heightening concerns at central banks in Indonesia and Malaysia over Singapore's market for non-deliverable currency forwards (NDFs), which they say has undermined foreign exchange controls.

The central banks are now using the manipulation probes to try to push for reforms and for more control over a rate-setting process now overseen by the local banking association in Singapore.

"The central bankers - Singapore, Indonesia, Malaysia and others in the region - are having a series of discussions and coordination regarding how to handle the situation," said Panji Irawan, president of ACI Indonesia, the country's foreign exchange industry group, who had first-hand knowledge of the talks.

A banker familiar with a Singapore review of the NDF rate-setting process has said it was likely to adopt reforms and tighter regulation similar to those planned in response to manipulation of the London interbank offered rate (Libor).

Bank Indonesia said on Wednesday it is coordinating with other central banks about the issue but gave no details.

NDFs are derivatives that allow speculation in or hedging of emerging market currencies that cannot be traded directly or freely due to exchange controls.

They are settled in dollars so there is no exchange of the underlying currency, but because they reflect investor expectations on the direction of a currency, they can influence onshore trading.


Since NDFs are traded offshore, the central banks have no regulatory control over the Singapore market.

But the news on manipulation has presented them with an opportunity to pressure Singapore to change a foreign exchange market that has frustrated central banks since its inception nearly two decades ago.

"Everybody is saying they need to make a better system and a better instrument that follows supply and demand, not an engineered rate, as it has such an impact on the real exchange rate in the cash market," Irawan added.

"The central bankers are coordinating and I think a kind of alignment will be seen very soon."

The Monetary Authority of Singapore (MAS) did not comment when asked by Reuters about discussions with other central banks. Bank Negara Malaysia did not respond to requests for comment.

Reference rates used to determine the settlement price of NDF contracts in the Indonesian rupiah, Malaysian ringgit and Vietnamese dong are set in Singapore by panels of banks overseen by the local banking association.

Thomson Reuters, parent company of Reuters News, acts as the agent for the Association of Banks in Singapore, collecting and calculating the rates.

Singapore's central bank ordered the banks on the pricing panels to review the fixing process last year as U.S. and British regulators cracked down on manipulation of the London interbank offered rate (Libor), a benchmark used to set interest rates for around $600 trillion worth of securities.

A source with knowledge of those reviews told Reuters they uncovered evidence that traders from several banks were communicating with each other in an attempt to manipulate the rates to boost their trading books.


The Indonesian and Malaysian central banks, in addition to holding talks in response to the problems with Singapore's NDF rates, have moved to promote their own onshore currency rates.

Bank Indonesia said on Wednesday that it is sending a letter to local banks reminding them that they are not allowed to trade in NDFs and encouraging them to use the onshore forward foreign exchange market instead.

Malaysia's local banks have already been told by their central bank that they can only use a domestically set reference rate to price currency contracts based on the ringgit. Until now, many had been using the rates set in Singapore.

But the prospects are slim such efforts would reduce the offshore NDFs' influence, market participants say.

NDFs in dollar/yuan and dollar/rupee use domestic spot rates set by the central banks as a reference point for settlement.

But some market experts are doubtful if a similar process would catch on for the likes of the rupiah and ringgit, given that much of the liquidity for these currencies is centred in Singapore rather than Jakarta or Malaysia.

Singapore hosts the second biggest foreign exchange market in Asia after Japan, according to the Bank of International Settlements.

"The aim is to try to get the most honest rate, and to do that you need the deepest market," said Professor Jin-Chuan Duan, director of the Risk Management Institute at the National University of Singapore.

When Indonesia tried to stop offshore trading of the rupiah in January 2001 to curb volatility in the currency, a group of banks in Singapore established the NDF market within a matter of weeks to get round the controls.

Media reports from the time detail how Bank Indonesia asked MAS to halt the market due to concerns it would undermine their new policy.

Since then, the unregulated market has grown, and the currency's offshore exchange rate can differ significantly from its onshore rate, especially if a central bank is intervening to influence rates onshore.

The latest discoveries of suspected attempts at NDF manipulation have fuelled calls for reform.

"The price signal it sends out can be very misleading," said Yip Sau Leung, an associate professor in economics at Nanyang Technological University in Singapore.

"It should be properly regulated or shut down, mainly because it is a shallow market with a lot of manipulation and speculation," he added.

The MAS said last year it was working with the Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee to review the way the NDF rates are set.

A banker familiar with the Singapore reviews said reforms being considered follow the proposals made by Britain's Financial Services Authority to reform the way the Libor is set and regulated.

Those include a new code of conduct that banks submitting rates should follow, a new independent administrator to oversee the governance of Libor, and law changes to make Libor manipulation a criminal offence. (Additional reporting by Rieka Rahadiana in Jakarta and Niki Koswanage in Kuala Lumpur; Editing by Michael Flaherty and Edmund Klamann)

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