Singapore’s NDF scandal ain’t what you think

Investigations into whether banks in Singapore have rigged synthetic exchange rates obscure the more fundamental problem of immaturity in the region's capital markets.

The non-deliverable currency forwards market in Singapore has become a casualty of the larger global scandal involving banks rigging Libor benchmark rates.

FX traders at a number of global investment banks and broker-dealers have been suspended as the Monetary Authority of Singapore conducts an investigation of “irregularities” into how prices are set for NDFs involving Indonesian rupiah, Malaysian ringgit, Thai baht, Philippine pesos and Vietnamese dong.

Singapore has developed into the greatest trading centre for those currencies, eclipsing onshore activity.

Although to date no evidence of market manipulation has been revealed, and some of those traders are back at work, many industry executives are worried that the MAS will unearth wrongdoing. The banks that set NDF prices are the same ones facing probes into how they price Libor, and the mechanism is similar: a panel of banks under the auspices of the Association of Banks in Singapore set the daily exchange rate that affects the value of NDF contracts when they mature.

However, the true culprit is regional countries’ capital controls, not bad behaviour by FX traders in Singapore.

MAS, along with regulators in Japan and Korea, have been looking into Libor-related pricing practices. Similarities with Singapore-based FX trading activities have snared NDFs, which are contracts for non-convertible or very thinly traded currencies. Companies use NDFs to hedge exposures and banks and hedge funds use them to speculate, although one person’s punt is another person’s hedge.

Given Singapore is now the world’s fourth-largest centre of FX trading, and seeing the impact of the Libor scandal on banks (last week RBS admitted to criminal price fixing and agreed to pay a $612 million fine to US, UK and Japanese regulators), the notion of a similar scandal has bankers and brokers on tenterhooks.

But the analogy is not quite apt. Given the attenuated nature of these currency markets and the small number of participants, they are ripe for manipulation, and the MAS will be absolutely right to come down hard on any malfeasance it unearths. At the same time, however, Singaporean authorities will be careful to calibrate their response.

This is clearly not a scandal in the same league as Libor rate-fixing, if it is a scandal at all. The Libor rate affects pricing for $350 trillion or more of contracts around the world, from mortgages to credit cards to student loans. Price collusion harms investors, municipal borrowers and homeowners. The scope of the Libor scandal is terrible and vast, and if class-action lawsuits in the US go ahead, some banks could face crippling punishments.

Nobody like this is suffering in the case of the NDF market, where participants are all professional investors. Some of them may be getting ripped off and there may be manipulation, which should be punished if proven, but grannies and orphans are not being cheated.

The NDF problems are a result of complaints by Singapore’s neighbours, whose central bankers hate the idea that banks in the city-state are undermining their capital controls by creating alternative valuations. NDF markets exist because of immature or repressed capital markets onshore. They are a symptom of Southeast Asian countries’ poor record in financial management, not a cause.

The MAS will surely tread carefully here: Singapore cannot afford to be perceived by the neighbours a haven of rapacious, hostile financiers. But if governments in Kuala Lumpur, Jakarta and elsewhere persist in trying to stamp out NDF trading, they will only hurt themselves. For example, both of those capitals have told their own banks to desist from trading in NDFs that don’t match onshore spot prices. But global investors and traders clearly don’t believe in those local spot prices, so they are unlikely to do business with Malaysian or Indonesian banks in the NDF space, thus depriving Southeast Asian financial institutions of potential revenue.

Moreover even if regional governments succeed in pressuring Singapore into clamping down on the NDF business, private markets will simply shift their pricing of hedges/speculating to new areas, such as credit-default swap spreads. That could make the situation even less comfortable for the neighbours.

So long as countries maintain capital controls, they will face offshore synthetic markets, somewhere, somehow. That is life. The only way to make NDF markets behave is to deepen one’s own capital markets so that countries can either handle international capital flows, or are sufficiently deep that the NDF markets follow their lead and not the other way around (as is the case with China and India).

Addressing withholding tax, tycoon-bank ties, and encouraging local corporations and government entities to participate in local bond markets is the only successful way for Southeast Asian governments to mitigate offshore currency speculators.

¬ Haymarket Media Limited. All rights reserved.

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