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Fixing Malpractice Spreads to NDFs

Colin Lambert reports on concerns in Singapore over behaviour surrounding some NDF fixings.

With the banking industry already reeling
from the discovery of malpractice in
money market fixings (see Libor story this
issue), evidence of wrongdoing has spread into the
FX market with reports that dealers at banks in
Singapore colluded to manipulate fixing rates
submitted for non-deliverable forwards.

An initial report on a Reuters newswire has been
confirmed by local market sources that evidence had
been uncovered in Singapore of FX dealers colluding
over the fixing of rates for NDFs for the Indonesian
rupiah, Malaysian ringgit and Vietnamese dong. The
news was not entirely unexpected, Profit & Loss has
reported on whispers in the market over such activity
previously (Profit & Loss, November 2012 and
P&L’s Squawkbox, July 1, 2012).

Following the report, market sources in Malaysia say that Bank Negara, the country’s central bank, ordered local banks to withdraw from the Singapore fixing,
pending the launch of its own local fix. Reports in Indonesia also
say that the country’s central bank, Bank Indonesia, has taken
similar action.

The discovery of the malpractice came to light following an
order from the Monetary Authority of Singapore to banks in the
city-state to review their processes for benchmark fixings, with
particular regard to Libor. Sources familiar with the issue tell
Profit & Loss that it was at this time that potential irregularities
were uncovered as part of a routine check of other fixings. “We
understand that several banks were involved,” says a senior
source at a bank who claims that institution is not involved in the
issue. “And that instant messaging and emails were used, as they
were in Libor, to submit high or low rates.”

As is the case with most benchmark fixings, a group of banks
submit quotes and the highest and lowest are normally withdrawn
to ensure a balanced fix. In the case of the NDF fixes, as was the
case in Libor, it is claimed that “four or five” banks have
uncovered evidence of collusion, meaning, according to the senior
banking source, the fixing rate could have been manipulated “but
not by much”. Prior to the discovery of collusion, 18 banks fixed
the rupiah rate, 15 the ringgit and 12 the dong.

A source at an interdealer broking company says that up to 20
dealers have been suspended as part of the investigation, pending
further study of available resources.

In Indonesia, the central bank has proposed the establishment
of a domestic fix for the rupiah and has told local traders not to
take offshore NDF rates into account when submitting rates.
Similar action is reportedly taking place elsewhere around the
region in what is seen in some circles as a blow to Singapore’s
prestige in the Asian foreign exchange market. Bank Negara has
also told local traders to use domestic rates for fixing, local
market sources say.

Although the allegations are bound to impact the reputation of
the FX market in the region, local market sources in Singapore
say that banks have already taken remedial action upon finding
evidence of collusion. At least three banks spoken to by Profit &
Loss say that explicit rules have now been written, barring traders
there from contact with traders at other banks during working
hours. “We have been told by the authorities that withdrawing
from the fixing – which is what we wanted to do – is not going to

be allowed,” says the head of FX trading at a global bank in
Singapore. “Therefore we have established rules that will
highlight any attempt to influence local fixings.”

Searching for Solutions

The spread of malpractice to NDF fixes from money market
fixes has accelerated demands in the industry for a new and better
methodology for submitting rates for fixes. Although several
sources accept that the rate manipulation is the result of
malpractice rather than bad process, they also see the need for a
more foolproof way of getting rates to the fixing body.

Several suggestions are open for discussion, however no
consensus appears to be emerging, leading to speculation that the
industry is waiting for the authorities to impose a framework. One
suggestion is that banks submit two-way rates subject to a
standard “spread”. While this would have the advantage of
ensuring outrageously extreme rates are not submitted, it could
still be subject to skewing, however.

Others have suggested that the last three trades executed by
voice brokers should be collated and averaged for a fixing rate
in each tenor, however this also has potential issues. Firstly,
voice brokers are well and truly engulfed in the Libor scandal,
and secondly they may not cover enough of the market,
especially if the new regulatory regime being enacted in the
US for NDFs leads to a sharp increase in activity on multi-
dealer platforms.

One suggestion that is gaining some ground is to utilise the FX
trade respository being constructed by DTCC. Market sources say
that reporting rules mean that a price can be established, while
not as quickly as it currently is, “in good enough time”, as one
puts it. One drawback of this method is that in several emerging
market NDF currencies, the number of trades executed in a day
may not hit a reasonable threshold to enable them to offer a good
indication of the market.

“I think the problem has been nipped in the bud, but that is not
to say we have not got to improve things,” says the Asian trading
head. “The best solution isn’t out there yet and it probably
involves a mix of several suggestions doing the round. Either
way, it will be better for the industry in general if we can come
up with a solution quickly.”

Paul Gogliormella

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