Published January 27, 2013
SINGAPORE – Internal reviews by banks in Singapore have found evidence that traders colluded to manipulate rates in the offshore foreign exchange market, according to a source with knowledge of the inquiries.
The discovery widens a global lending rate scandal into new markets, as fallout from the Libor case puts banks under added scrutiny and spurs both regulators and institutions to reconsider how certain key interest and currency rates are set.
The probes found evidence showing that traders from several banks communicated with each other over electronic messaging about what rates they were going to submit for the local banking association's fixings for non-deliverable foreign exchange forwards (NDFs), aiming to benefit their trading books.
"Traders were talking to traders, saying: 'I need you to help me today, I need to fix low,'" said the bank source, who asked not to be identified due to the confidential nature of the reviews.
NDFs are derivatives that let companies and investors hedge or speculate on emerging market currencies when exchange controls make it difficult for foreigners to participate directly in the spot market.
The contracts are settled in dollars, so there is no exchange of the underlying currency, but they can affect spot exchange rates.
The Monetary Authority of Singapore ordered banks that help set local interbank lending rates and NDF rates 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.
The investigations into Libor led to fines of $1.5 billion for UBS AG and $451 million for Barclays Plc for rate rigging. Regulatory probes stemming from the Libor cases in the United States and Britain have also revealed evidence of attempted manipulation of benchmark interbank lending rates in Tokyo, Hong Kong and Australia.
Banking watchdogs in Britain and elsewhere in Europe have begun trying to reform the way Libor and other interbank rates are set, to try to ensure the numbers can't be manipulated.
The Singapore bank probes show that the focus is now turning to other benchmarks, amid concern that they too were manipulated.
The biggest banks in the Asian NDF markets include UBS, JPMorgan Chase & Co , DBS Group Holdings Ltd and HSBC Holdings Plc .
The source did not make specific comments about possible wrongdoing by individual banks or traders and Reuters has no independent evidence of such wrongdoing.
UBS, JPMorgan, DBS and HSBC declined to comment. Reuters also contacted the other 14 banks involved in setting NDF rates. Twelve said they had no comment while two did not respond to repeated telephone and e-mail requests for comment.
Under the NDF rate-setting process, organized by the Association of Banks in Singapore (ABS), banks submit their reading of the spot price for the Indonesian rupiah, Malaysian ringgit and Vietnamese dong every working day at 11:00 a.m. (10 p.m. ET).
A settlement rate for NDF contracts due to expire is then calculated by taking the average of the submissions, excluding the highest and lowest quarters of contributions from the banks.
While the exclusion of the rates at the top and the bottom of the range is meant to ensure that one bank cannot try to improperly skew the rate, the concern is that collusion by traders at multiple banks could influence the result.
There are 18 banks on the panel for the rupiah, 15 for the ringgit and 12 for the dong.
The Monetary Authority of Singapore told banks in the city state last July to review the way they set interbank lending rates, in the wake of the Libor scandal.
As bank officials pored over documents and communications, they came across evidence that raised alarm bells over activities in the NDF markets as well, spurring an extension of the reviews to those markets in September, the source said.
In Singapore, benchmark rates for both interbank lending and certain NDFs are set by panels of banks organized by the ABS. Thomson Reuters, parent company of Reuters News, calculates and distributes the spot reference rates for the rupiah, ringgit and dong NDF markets on behalf of the ABS, as well as other interbank lending and currency rates. "Thomson Reuters supports any measures that create more robust benchmarks for the market and we fully cooperate with regulators, authorities and benchmark sponsors' investigations as required," a Thomson Reuters spokeswoman said.
In December, the Monetary Authority of Singapore issued a statement setting out the banks' obligations under the reviews, although it has not made clear whether it would take action of its own based on the results.
"The banks have to immediately report any irregularities they uncover to MAS, and have to take appropriate disciplinary action against staff involved in such irregularities," the statement said.
"The reviews are ongoing, and it is premature to speculate on the outcome of these reviews at this stage."
The central bank provided no further comment when asked by Reuters about the probes' findings.
The source said most banks had submitted their reviews to the authorities at the end of last year but did not say what disciplinary actions if any were planned for banks or traders who tried to manipulate rates.
The MAS said last year that it was working with the ABS to review the way NDF rates and the city state's benchmark lending rates are set. The association declined to comment for this story.
Banks dealing in over-the-counter products in Singapore such as NDFs follow a code-of-conduct set by the Singapore Foreign Exchange Market Committee, known as The Blue Book.
That includes a requirement that: "dealers and brokers shall not engage in manipulative or deceptive conduct or any form of conduct which would give other users of the market a false or misleading impression as to prevailing market conditions."
MARKET THINS OUT
Trading volumes in the NDF markets are much smaller than for derivatives linked to Libor, although they are hefty enough to effect spot rates for the underlying emerging market currencies.
For the Indonesian rupiah, the biggest market fixed in Singapore, daily turnover is estimated between $700 million and $1.3 billion, according to an HSBC report. Since NDFs are traded over the counter, there is no fixed data on volumes.
Traders say even a small movement in an NDF fixing could have a big impact on a bank's trading book if it had a large number of contracts expiring.
Many of the traders involved were junior and did not appear to think they were doing anything wrong, said the source.
The NDF market in Singapore developed after the Asian financial crisis, when capital fled the region causing several area currencies including the rupiah to slump in value. NDFs gave banks a way around controls that governments subsequently imposed on their currencies to curb those capital flows.
Of the 40 to 50 NDF traders based in Singapore, roughly half had either been put on leave, including those suspended while their activities in the market were under investigation, or left their jobs during the Singapore probes, the source said. It was not clear how many may have been or will be reinstated after the probes' completion.
"A lot of banks are stuck, traders are suspended or have left, so the market is seeing around half its usual volume," the source said.
Flows in Indonesian rupiah and Malaysian ringgit NDFs have been thin since the last quarter of 2012 according to Thomson Reuters IFR Markets, although volumes in ringgit NDFs picked up at the start of this year.
The action by U.S. authorities last month against UBS for its part in the Libor scandal included a criminal charge against the Swiss bank's Japanese subsidiary for yen Libor manipulation.
The charge sheet by the Commodities Futures Trading Commission against the bank also revealed other markets in Asia where problems emerged.
"Through its internal investigation, UBS identified evidence of similar misconduct involving submissions for at least the Hong Kong Interbank Offered Rate ("HIBOR"), the Singapore Interbank Offered Rate ("SIBOR"), the Singapore Swap Offer Rate ("SOR") and the Australian Bank Bill Swap Rate ("BBSW")," a footnote in the charge sheet read.
The Hong Kong Monetary Authority said in December that it was looking into the findings on Hibor.
The Australian Securities and Investments Commission declined to comment on the BBSW.
(Reporting by Rachel Armstrong; Editing by Michael Flaherty and Edmund Klamann)