Cost pressures and tougher regulation mean banks in Singapore are struggling to replace the 100 traders who left the market during a rate-fixing probe.
The world's fourth largest foreign exchange center is still reeling from the crackdown, which has left volumes flowing through banks' once vibrant interest rate and emerging market currency trading desks a long way below pre-scandal levels.
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Regulatory probes have hit banks' trading businesses hard across the globe since the 2008 financial crisis. Singapore's rate probe followed a global scandal involving the London interbank trading benchmark, Libor, that unfolded last year.
Unlike other jurisdiction, where regulators fined and punished banks one-by-one, Singapore chose to mete out its punishment in one go, censuring a record 20 banks after finding 133 traders tried to manipulate lending and foreign exchange reference rates.
Around three-quarters of those traders have left the market, and new regulatory background checks mean banks are having their work cut out bringing in replacements.
"Each hire is scrutinized due to the new regulations," said Martin Andres, head of sales and trading for Asia at recruitment firm Selby Jennings. "So it is more difficult to get top talent onboard, especially if they are within the proprietary trading units."
The Singapore regulator first ordered banks in the city-state to review benchmark borrowing rates nearly a year ago. That review was extended in September last year to foreign exchange benchmark rates used to price currency derivatives, particularly instruments known as non-deliverable forwards (NDFs).
Volumes in the interest rate and NDF markets will struggle to recover any time soon, according to brokers and analysts interviewed by Reuters.
"A lot of the NDF volumes dried up during the reviews," said one foreign exchange analyst, who asked not to be named as he was not permitted to discuss the reviews with the media. "It will take a long time to pick up again."
Another analyst estimated that volumes in the rupiah NDF market dropped to around $200 million a day during the reviews, having been closer to $1 billion a year earlier.
PLUGGING THE GAPS
The Monetary Authority of Singapore (MAS) found staff at all of the 19 banks that helped set the rates were involved in trying to manipulate rates to a certain degree, along with one other that was not even on the rate-setting panels.
The regulator stressed that the numbers involved represented just a small part of the trading community in Singapore. However bankers say 133 people is still a big chunk of the city's dealers in interest rates and NDFs.
Some in the market believe the gaps will never be completely filled.
"If all the dismissed traders can't get jobs then where will the new senior guys come from? I don't think the market will return to former levels of business," said one Singapore broker.
While Singapore's lending benchmarks are not as significant to global financial markets as the Libor, industry estimates suggest there are around S$2 trillion ($1.6 trillion) in derivatives contracts which reference either the Singapore interbank offer rate or the Singapore swap offer rate (SOR), along with around S$200 billion of loans based on them.
UBS AG , which received one of the stiffest penalties from MAS, saw most of its Singapore rates and NDF traders depart during the investigation, according to two people with knowledge of the matter.
It has since replaced some of them, though it is expected that its Singapore interest rates and NDF desks will be unlikely return to their previous size.
"That particular business line will inevitably be much smaller," said one former senior executive for the bank.
The MAS review, which involved checking more than 100 million documents, did not find conclusive evidence that rates were successfully manipulated but noted that the traders' conduct reflected a lack of professional ethics.
In the future, a similar lack of ethics could see banks and traders face criminal or civil charges under new proposals from MAS, meaning banks are under pressure to bring in much tighter supervision procedures for markets that are based on benchmarks.
For the dealers that have gone, there is relief that they are unlikely to be held criminally liable, even if they will struggle to find work.
"I think what the traders are happy with is the acknowledgement there is no criminal breach," said one financial services lawyer in Singapore. "It cements their position that there was no regulation in this area previously."
($1 = 1.2503 Singapore dollars)
(Additional reporting by Clare Baldwin in HONG KONG; Editing by Alex Richardson)