By Rachel Armstrong and Adriana Nina Kusuma
SINGAPORE/JAKARTA Feb 7 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
"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
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
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
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
"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
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
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.