Singapore: Mukesh Kumar Chhaganlal said he tried to warn his manager at UBS AG about the “increasingly unrealistic" currency rates being set last year for the Indonesian rupiah against the dollar.

His manager told him nothing could be done because “there was no way to control the market or how people set the rates on the market", according to court documents Chhaganlal filed in Singapore recently in his wrongful termination suit.

Months after this alleged conversation, UBS fired Chhaganlal. He says in court papers he has not been given the reasons for his sacking, and that he was not a party to the fixing of any reference rates in the market. Six of his colleagues on the UBS trading desk also left the firm.

The staff departures came after regulator Monetary Authority of Singapore (MAS) ordered banks to review how they set currency and interest rates following scandals in London and the US.

Chhaganlal’s battle with the Swiss bank is part of a broader story about how a clubby, foreign exchange trading community was torn apart in a rate-fixing manipulation probe in Southeast Asia’s financial hub.

It also exposed weaknesses in the way central banks in the region manage their currencies—particularly in Indonesia. Bank Indonesia, the central bank, told Reuters it has been holding discussions with currency traders about how to strengthen its rate-setting mechanism.

UBS has declined to make any statement on the lawsuit by Chhaganlal, which it is defending, or the departure of its traders, saying it does not comment on legal cases or staff matters. It said it is “co-operating fully" with Singapore’s reviews on how banks fix interbank lending and currency rates.

Born in financial crisis

The main product at issue, a non-deliverable forward (NDF), allows foreign investors and companies to hedge or speculate on emerging market currencies when exchange controls in those countries make it difficult to trade directly in the spot market.

Jakarta had strongly opposed the creation of an NDF market for the rupiah when it was first set up after the 1997/98 Asian financial crisis.

Unlike neighbouring Malaysia, Indonesia did not impose capital controls during or immediately after the financial crisis—it was under an International Monetary Fund (IMF) programme at the time and the IMF frowned on such controls.

But Bank Indonesia thought the lack of such controls made the rupiah vulnerable to speculators. So it imposed new rules in January 2001 banning the transfer of rupiah to non-Indonesian residents, making it harder for dealers in Singapore to trade the Indonesian currency.

Within a month, Singapore’s bankers had found a way round the obstacle by establishing the rupiah NDF market—similar to what traders had done previously in Latin America, Eastern Europe and elsewhere in Asia.

Singapore’s NDF market increasingly rankled central banks in the region, who loathed the idea that a handful of foreign bankers could undermine their exchange rate regimes by creating alternative offshore markets.

A trigger to act against them came in the mid of a probe by global regulators into bank manipulations of the London interbank offered rate (Libor) in Britain and the US last year. The MAS told banks on rate-setting panels to review how they determine reference rates used to benchmark bank lending and, subsequently, NDFs.

Reuters revealed in January those reviews had found evidence in eletronic messaging conversations that traders from different banks were colluding with each other to set NDF rates to benefit their trading books rather than reflecting market conditions.

Banks on the rate-setting panels have declined to comment on the investigations.

As banks pored over thousands of emails and electronic message conversations, they were under public instructions from MAS to take disciplinary action against anyone involved in “irregularities".

People with direct knowledge of the matter say that process has led to the decimation of a once robust community of NDF and interest rate traders. At least 50 were suspended by their banks at one point—around half the Singapore market—though some have since been allowed to return to work, they said. The rest were fired or left voluntarily.

The fallout from the rate-manipulation scandals in London, New York and now Singapore has put more regulatory pressure on banks—under scrutiny since the 2008 global financial crisis—to reform the way interest and currency rates are set.

Banks in Singapore have already decided they will stop setting reference rates for Malaysia’s ringgit and Vietnam’s dong. The local foreign exchange and banking associations are expected to announce further reforms in the coming months.

The scrutiny may also create more transparency in the way currency rates are set in countries such as Indonesia.

“The blackhole"

Singapore’s NDF trading market is an especially tight-knit group, according to people involved. One of their favourite hangouts was the Il Fiore (or The Flower), an easy-to-miss basement bar below a Singapore office block. Nicknamed “The Blackhole", it’s dark and cozy inside, with a portrait of a topless woman in a red thong greeting patrons heading to the toilet.

Outside, it’s cramped and smoky, with card games common on the patio’s round tables.

For more than a decade, many of these traders, operating with scant oversight or regulation, tried to help each other make money by manipulating the currency rates submitted to a Singapore bank panel, according to interviews with participants. They did this mostly through “chat" messages sent through their trading terminals.

NDFs allowed them to make a bet on the direction of the currency without ever having to physically exchange rupiah. The market also gave foreign companies and fund managers a way to hedge against sudden swings in the exchange rate that could affect the value of their investments in Indonesia.

The NDF market for the Indonesian rupiah began on 19 February 2001 with a $1 million trade in a six-month dollar-rupiah contract. Given the fledgling market’s small size, the dealers drafted in to trade it were often quite junior.

But as the market started to thrive, and daily volumes went from tens to hundreds of millions of dollars, these traders swiftly rose up the ranks, and pay scale. Eventually it included other currencies, such as the ringgit, the dong and the Philippine peso.

“The NDF market grew very quickly," a former trader said. “Guys became head of desk when they were still pretty young." As volumes grew, so did compensation, as traders were typically allowed to keep a percentage of their gains as an annual bonus.

Significant impact

By 2011, according to data from the Bank for International Settlements, the offshore market for the rupiah was seeing volumes of up to $1 billion a day and was bigger than the onshore one. A study by Bank Indonesia in 2012 showed the NDF market often had a significant impact on its onshore market.

This underscored the Indonesian central bank’s concern that a small band of Singapore traders was helping to move an exchange rate for a country of 250 million people.

Standard Chartered, Singapore’s DBS and OCBC, UBS, Deutsche Bank, and Royal Bank of Scotland were among the players in the NDF market.

Despite advances in electronic trading platforms, where trades are executed in a faster and less expensive manner, the Singapore NDF market remained mostly an old-fashioned phone-brokered one.

The older generation of traders in particular liked to keep it that way. They used brokers to match up currency buyers and sellers during the day. After work, the traders were rewarded with nights on the town, expensed by the brokers.

Asked why Singapore’s NDF market has been slow to shift to electronic trading, a former broker quipped: “Because a screen can’t buy you a beer."

Cowboy market

While it would normally be difficult to influence an exchange rate—the billions of dollars that pass through most currency markets every day make them close to impossible to manipulate—currencies like the rupiah are different.

Traded just onshore, Singapore banks had to rely on quotes from traders in Indonesia to know what the spot rate was, but often they did not trust the prices they were being given.

“It’s a cowboy market, nobody knows what the rate should be," said one trader. “You are sitting in Singapore, you don’t know where the market is trading, (Bank Indonesia) is asking the local banks to quote you some other price, so we don’t know where to put the rate."

With Singapore traders reluctant to rely on the spot rates they were being fed from Jakarta, they opted instead to talk among themselves about where the rate should be. It was, as one trader put it, a form of “price discovery".

Bank Indonesia acknowledged weaknesses in how the rupiah reference rate was fixed. The central bank has been discussing how to establish a credible reference rate in Indonesia that can be used as an alternative to offshore fixing in Singapore, said Perry Warjiyo, deputy governor of Bank Indonesia.

“When it is strong, we expect it can be a reference," he told Reuters. “We want to drive it as a reference," he said, adding that the central bank hoped to start the new reference rate within the next two months. “We have met with market players."

“Rigged dice game"

In June 2012, Britain’s Barclays was fined $453 million for manipulating Libor, a lending benchmark used to price trillions of dollars of loans and derivatives. The shenanigans revealed in that scandal prompted other regulators to take a closer look at their own domestic benchmarks.

When banks in Singapore began MAS-ordered reviews into their domestic lending reference rates, it became clear a Libor-style pattern of rate rigging was apparent in the NDF market.

“They started to look at the interbank fixing, then they thought they should look at other benchmarks, so they looked at NDFs and went ‘oh s**t’," said one banker with knowledge of the reviews.

Bank investigations were throwing up evidence that the constant messaging among NDF traders often centred on the daily fixings and whether dealers at different banks could do their friends a favour.

If they had a big set of contracts due to expire, they reached out to their peers, trying to push the fixing in their favour.

“It was like a rigged dice game, where the traders were changing the numbers on the dice when no-one was looking," said a former foreign exchange dealer.

As the MAS reviews took place, traders suspected of wrongdoing were suspended, causing trading volumes to sink.

To corporate treasurers and fund managers who paid for the derivative to hedge currency risk, long-held suspicions that the market was gamed was no longer a secret.

“It’s one of those things that you have to live with because they do it, everybody knows it, and we are the victims," said one hedge fund manager who uses NDFs.