Growth comes with side effects for Singapore; Opaque manipulated business brings unwanted attention

March 12, 2013 3:48 pm

Growth comes with side effects for Singapore

By Jeremy Grant

Singapore generally dislikes drawing attention to itself when it comes to financial markets.

Having discreetly built itself up as an Asian financial hub, Singapore has now become one of the world’s largest centres for wealth management and commodities trading. But recently the Lion City has been drawing some unwelcome attention in the foreign exchange markets, where it is ranked fourth-largest in the world by trading volume.

Last month two former UBS traders sued the Swiss-based bank alleging they were wrongfully dismissed when they say the bank fired them for gross misconduct. In two lawsuits filed in Singapore they claim they were fired to cover up any role the bank had in allegedly manipulating the pricing of foreign exchange derivatives.

One, Prashant Mirpuri, was employed as an “emerging market southeast Asia non-deliverable forward trader”, according to court filings. The other, Mukesh Kumar Chhaganlal, was a former co-head of macro-trading, emerging markets Asia.

Behind these opaque job titles lies an equally opaque business done in Singapore: dealing in a type of foreign exchange contract known as a non-deliverable forward.

NDFs trace their roots in Asia to the region’s financial crisis of the mid-1990s, after which many slapped in place currency controls.

They are an obscure corner of the over-the-counter derivatives markets where two parties agree to buy or sell a foreign currency – in the Singapore case currencies of southeast Asian countries Malaysia, Indonesia, the Philippines and Vietnam – for a fixed price at some future date.

Such contracts are used by companies to protect themselves against fluctuations in non-convertible currencies. Banks in Singapore run trading desks where they are also traded speculatively, usually over the phone. Mr Mirpuri was in charge of one such desk at UBS.

Because it is not possible under an NDF to take delivery of the local currency when it comes to settling the contract on expiry, both counterparties take their cue from a “fixing rate” set daily by a panel of banks in Singapore, in Indonesian rupiah, Malaysian ringgit, Vietnamese dong and so forth. That is used to calculate a dollar profit or loss at contract expiry.

Quite how this “shadow” fixing system has emerged in Singapore, alongside the official rates set by southeast Asian central banks, is a bit of a mystery. Bankers say it was because traders didn’t historically trust the onshore fixing. It is easy to forget the depth of anti-market feeling in Malaysia during the Asian crisis.

But the fact is Singapore is the biggest NDF market in Asia outside Japan. This has become awkward for Singapore, due to the UBS lawsuits and the scandal over manipulation of the London interbank offered rate, or Libor.

As part of its own probes into Libor and Sibor, a local equivalent, the Monetary Authority of Singapore in September directed banks to review their processes for setting rates for NDFs. Banks should “report immediately any irregularities” and take “appropriate disciplinary action against staff involved”.

UBS declines to comment on the traders’ lawsuits. It says it is “co-operating fully with the authorities” on the Singapore regulator’s review.

In his lawsuit, Mr Chhaganlal claims that after the Libor scandal emerged he raised with his superiors “concerns over the way in which reference rates were being set in the Singapore market”. He observed “increasingly unrealistic” US dollar-rupiah rates.

At least one central bank in southeast Asia seems uneasy. Bank Negara, Malaysia’s central bank, this month reminded domestic banks to use a locally set reference rate for dollar-ringgit transactions, implicitly steering them away from the rate set in Singapore.

None of this looks good. It was the opaqueness of largely unregulated OTC markets, such as credit default swaps, that fuelled the 2008 global financial crisis.

The Singapore regulator is expected to wrap up its review of the NDF market soon. It is also working on new rules for OTC derivatives as part of Singapore’s compliance with a global drive to tighten up on this area.

The US Dodd-Frank Act pushes for NDFs to move away from the clubby, phone-brokered market and on to more transparent electronic trading platforms.

Singapore and other Asian regulators are less keen. They don’t want to choke off nascent markets, for understandable competitive reasons. But leaving the NDF market unregulated should not be an option if Singapore wants to avoid attracting any more unwanted attention.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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