Singapore banks move on after Indonesian shock

Singapore banks move on after Indonesian shock

SINGAPORE (Dow Jones): As shell-shocked foreign exchange
dealers in Singapore recuperate from Bank Indonesia's
controversial currency rules which have effectively wiped out the
offshore rupiah market, many are bracing for the fallout on the
industry.

And once banks in Singapore settle their outstanding rupiah-
related transactions with other counter-parties offshore ahead of
Thursday's deadline, negotiations on the setting up of a non-
deliverable currency forward market to replace spot rupiah
trading will likely gain momentum, dealers say.

Bank Indonesia recently denied speculators access to funding
for short rupiah positions, in its bid to curb speculative attack
on the beleaguered currency. Under the central bank's tighter
regulations, announced on Jan. 15, banks outside Indonesia can no
longer buy or sell rupiah among themselves.

Offshore banks can only sell rupiah to Indonesian counter-
parties - and even then, it must be rupiah that they already own.

The new rules effectively prevent speculators from short-
selling the rupiah.

Brokers, already feeling the pinch from electronic broking
systems and shrinking volumes in Asian foreign exchange markets,
will likely be the biggest casualty from Indonesia's foreign
exchange curbs, since they rely on currency flows for their
income, industry participants say.

While some rupiah brokers are already forced to divert their
energies to other currencies, like the Thai baht, or other
currency instruments, such as non-deliverable currency forwards,
others could suffer from layoffs.

"Brokers are already facing a tough time at the moment; with
the demise of the rupiah market, there'll be some retrenchments,"
says a European bank dealer.

For one broker at a large foreign firm, his future still hangs
in the balance.

"We'll be having a meeting next week, after which we'll have a
clearer idea," says the broker. "But I think it will affect us
sooner or later."

Foreign exchange dealers in Singapore have less to worry about
- at least for now - given the smaller risk of getting laid off.
Most banks have already downsized their treasury operations since
the 1997-98 financial debacle, leaving them relatively lean.

"We have less currencies to trade now, but most of the banks
were foreseeing a slowdown of activities and have already trimmed
their operations," says a chief dealer at a European bank. "A lot
of dealers trade a wide range of instruments and they can just
switch their portfolios."

"We are relooking our foreign exchange operations - whether we
need more people or whether they can be redeployed into something
else," says the country manager of a European bank. "The baht is
already a half market" after the Thai central bank tightened
regulations on transactions in the local currency late last year.

A dealer at another European bank says: "The good thing was
that even before BI (Bank Indonesia) came out with this ruling,
I've been told that I'll be quoting the baht as well. We've more
or less been consolidating our regional desk. Out of three
currencies - which were the Singapore dollar, the baht and the
rupiah - we have two dealers quoting them, so when they took away
the rupiah, it didn't affect us at all."

Indeed, with trading volume in the rupiah accounting for a
small portion of turnover in Asian foreign exchange trading, many
market watchers say Bank Indonesia may just be shooting itself in
the foot by chastising offshore currency speculators for the
rupiah's misfortune.

The bulk of the selling pressure on the rupiah has come from
Indonesian corporates needing to fulfill or hedge their dollar
requirements. Rupiah trading volumes in offshore markets have
dwindled since the financial crisis, with daily turnover in
Singapore estimated around $50 million to $100 million before the
regulations were imposed last month.

As they digest the complex regulations which have smothered
the offshore rupiah market, banks in Singapore have been
discussing the formation of a non-deliverable currency forward,
or NDF, market, which doesn't require any delivery of the rupiah.
This market would likely be beyond Bank Indonesia's jurisdiction
since settlements are made in dollars, dealers say.

"It's like a black market," says a U.S. bank dealer. "It's
meant to operate without the blessing of the central bank."

Among Asian currencies, there is already trading in non-
deliverable forwards on the South Korean won, the New Taiwan
dollar, the Philippine peso, the Indian rupee and the Chinese
yuan.

Banks would first need to agree on the technicalities, such as
the point of reference for their fixing rates before the market
can take off, dealers say.

But there already signs of the market evolving. A handful of
the larger banks are offering non-deliverable forward quotes on
the rupiah upon their customers' request, without going through
brokers.

But there already signs of the market evolving. A handful of
the larger banks are offering non-deliverable forward quotes on
the rupiah upon their customers' request, without going through
brokers.

"A lot of people are checking. Three major banks have been
checking around and asking us if we're interested in making
prices in rupiah NDF, but the market is still inactive," says the
European bank dealer.