Singapore’s mixed record on finance sector reform

Foreign exchange trading desks in Singapore, Asia’s largest forex hub, have changed beyond recognition.

First, there has been the impact of the electronic trading revolution that has swept those markets in recent years. Traders who once set up currency deals on the phone have been either laid off or are waiting while the banks figure out how to adjust to a new world where machines do the trading.

“The voice [ trading] guys are sitting twiddling their thumbs,” one senior forex trader said recently. One of his buddies at a European bank had so little to do that he spent the past three months learning Italian for a planned cycling trip in Italy.

The second impact has been the cold blast of regulatory change, which has also affected the way financial benchmarks such as the Singapore interbank offered rate — the smaller cousin of the scandal- ridden Libor in the UK — are handled.

Not long after UK watchdogs in 2012 swooped on banks suspected of rigging Libor, Singapore joined what has become a sprawling global probe into the way these financial benchmarks are set. The $ 5.3- trillion- a- day forex markets later became engulfed in separate probes by more than 15 regulators including the US, UK and Switzerland.

Singapore has said little about its role in the forex probes, beyond that it “stands ready to assist”. This may seem strange for a financial centre whose forex market is bigger than Hong Kong’s. It begs the question: is there something you’re not telling us?

Singapore has adopted a “wait- and- see” approach to how it implements other global regulatory initiatives — notably reforms of the derivatives markets that in the US are embedded in the Dodd- Frank Act. But when it comes to financial benchmarks and forex, Singapore has sought to push reforms that have attempted to increase the transparency not only of how financial benchmarks are set, but also how the forex markets operate.

The key moment came in September 2012, when the Monetary Authority of Singapore decided to widen its probe of local benchmarks. It looked into banks’ behaviour in the setting of rates for non- deliverable forwards ( NDFs) — a type of currency derivative.

Possible wrongdoing

Not long after UK watchdogs in 2012 swooped on banks suspected of rigging Libor, Singapore joined what has become a sprawling global probe into the way these financial benchmarks are set. The $ 5.3 trillion- a- day forex markets later became engulfed in separate probes by more than 15 regulators.

The move came well before the UK’s Financial Conduct Authority specifically asked banks in April 2013 to look into possible wrongdoing in forex and several other non- Libor benchmarks. The result was that banks in Singapore were faced with early scrutiny of their behaviour not only in local interest rate benchmarks but also forex. A new set of proposed rules for both markets was unveiled in June last year. Banks have been scrambling to adopt them even though they are not yet law.

The senior forex trader says he has sat through hours of lectures on compliance and trading, and his entire desk has had to sit exams at the MAS— something to which traders in London, theworld’s largest forex centre, have yet to submit. ( There is proposed legislation that codifies criminal and civil sanctions for the manipulation of any financial benchmark.)

Singapore has not always been ahead. The UK made manipulation of Libor a criminal offence last year. Oversight of the rate- setting process for Libor has been taken from the British Bankers’ Association and handed to a US exchange operator. In Singapore it is still in the hands of the Association of Banks in Singapore ( ABS).

But for the “swap offered rate”, which represents the average cost of funds used by local banks for commercial lending, the historic poll of banks’ rates has been replaced by a traded rate.

The clubby world in which rates for NDFs on Southeast Asian currencies were for years set by a small group of banks in Singapore has been all but dismantled, replaced by the use of official rates set by the central banks of those Southeast Asian nations instead. “Although the NDF market may be smaller, the market is getting the rates it should be getting,” says Ong Ai Boon, ABS director.

Singapore has also been trying to get ahead of the rest of the region on other areas such as combating money laundering and tax evasion. In May it signed a deal with the US allowing compliance with the US Foreign Account Tax Compliance Act, or Fatca.

With 12 per cent of Singapore’s economy coming fromf inancial services, thismakes sense. But it needs to do more to show it is on the front foot in tackling illicit money flows from other sources. Taking as long as this year to stop printing the ultra- large S$ 10,000 ( US$ 8,000) banknote was, perhaps, a little behind the curve.