Today’s column is definitely not one for the teenagers –
indeed it looks at an issue only those of us of a (ahem) certain vintage, will

I was fascinated to read over the weekend that there is a
big brouhaha (which sits between controversy and scandal on the outrage scale)
building in Malaysia over FX losses made by the country’s central bank in the
early 1990s.

Apparently the issue has re-emerged as a whistle blower now
claims that the bank lost $10 billion trading and that there was no official

Before going any further it should be noted that Bank Negara
Malaysia says in a statement, “The
recent media coverage on forex losses refers to events which happened almost 25
years ago. Since then, the Bank has moved forward, stronger, more transparent
and accountable.”

Of that
there is no doubt, but spot dealers of a certain generation will today no doubt
be wearing, as I am, a wry smile because in the late 1980s and early 1990s
Negara was the latest in a growing line of central bank bugbears that created
mayhem in the market.

It really
started, to my memory at least, with the major government-sponsored eastern
European banks, like (and these were our names for them) Foreign Trade Moscow,
Cesko Prague, National Bank of Hungary…the list went on. These players were
aggressive in the markets but generally played the game the right way – even
though you didn’t want to be on the end of one of their big orders.

Then the
Middle Eastern sovereign players started trading FX aggressively and they were
followed by numerous Asian central banks who started flexing their muscles in
the late 1980s.

What was
different with the Asian players was the markets they traded – it was obvious
they were punting rather than reserve managing. They had a short term impact on
the market and caused no little angst for the traders on the bank desks who
each received 50 million of 300 million units bought or sold (often having been
told “only you”!)

If nothing
else the experience that followed highlighted how, in a deep, liquid market
like FX, even the biggest punters could come unstuck, for not only Negara but
other Asian central banks suffered trading losses in the majors (I recall a
rumour that two traders in Mongolia actually managed to wipe out their nation’s
entire reserve pool by getting dollar-Swiss wrong in spectacular style).

The whisper
at the time was that Negara had made some serious losses in dollar-mark (look
it up kids or ask the old guy at the end of the sales desk) because the people
actually punting it were not the trading desk, but senior management.

So, apart
from the mild interest this story arouses (and the opportunity to reminisce
about the old days), why do I bring this up? Because it is an opportunity to
reiterate that maintaining an orderly market is the responsibility of everyone in FX, from the smallest to the
largest and the least influential to the most.

There is,
of course, a major sovereign player in FX markets (I think the current nickname
is “Big Red” but I’m not sure) who is rumoured to be responsible just about
every time the market moves, but the circumstances now are very different. Not
only is that institution more likely to be reserve managing, it also trades
responsibly for the most part as far as counterparties I have spoken to are

The biggest
change in FX markets in the last two years has been a dramatic thinning out of
the order book, depth of book is a thing of the past in any reasonable size.
This means that anyone seeking to trade a larger amount has to be smarter about
it and generally speaking they are.

If a player
was to act the way some central banks used to you’d have to think the result
would be mayhem in the markets with a lot more flash crashes involved (it
should be stressed the one central bank-inspired flash crash was policy

This makes
it a good thing that the majority of the world’s central banks – or at least
those with huge reserves and/or impact on markets – are signing up to the
global code of conduct, for as this episode which is, rather bizarrely, raising
its head in Asia again shows, not only can central banks get it horribly wrong,
they can also cause chaos whilst doing so.



Colin Lambert

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