* NDF traders distrust onshore pricing of rupiah
* Banks set to cease publishing offshore ringgit rate for
* Move follows probes that found attempts to manipulate
Singapore FX fixings
* Bank Indonesia to create new reference rate in April
By Vidya Ranganathan
SINGAPORE, March 22 (Reuters) - Banks in Singapore are
stubbornly against adopting domestically set reference rates for
derivative contracts in the Indonesia rupiah, despite preparing
to drop their own rate fixing for the Malaysian ringgit and
Traders in non-deliverable forwards (NDFs) distrust onshore
prices for the rupiah, fearing that a lack of liquidity in
Indonesian currency markets and the central bank's heavy-handed
intervention distorts pricing.
"NDFs are priced off the fixing," said one trader. "They
have to make sure that the local fixing is reflective of
Singapore and Hong Kong are the regional centres for trading
NDFs, derivatives that allow speculation in or hedging of
emerging market currencies that cannot be traded directly or
freely due to exchange controls.
Singapore banks, under pressure from regulators, are soon
expected to abandon their process of fixing a daily reference
rate for Malaysia's ringgit, following probes into manipulation
of the spot price used for settling such contracts.
Malaysia had been pushing since last year for traders in
Singapore to accept an onshore rate for trading the currency.
Policymakers in Jakarta share their Malaysian counterparts
concerns about the impact of offshore speculation on their spot
currency markets, but the city-state's banks are loath to make a
similar switch to accept a reference rate set by Bank Indonesia.
The Indonesian central bank, which last month reminded local
banks they were banned from trading in NDF rupiah, has said it
will create a new reference rate, based on market prices, in
But market participants say traders in rupiah NDF markets,
hedge funds, portfolio investors and even blatant speculators
would be exposed to big risks if their contracts were settled on
the basis of a highly unpredictable rupiah rate.
"There has been some talk of tight dollar liquidity onshore
occasionally, and this could be an issue that may complicate
offshore from using onshore rates," said Gundy Cahyadi, a
strategist with OCBC Bank in Singapore.
NDF traders in Singapore said they would wait and watch as
Indonesia rolls out its new onshore reference rate, but would
stick with the offshore fixing for their contracts for now.
If Singapore's banking association is forced to abandon the
setting of a rupiah benchmark and there is no credible onshore
rate, NDF players may move operations to a new destination, such
as Hong Kong, traders say.
Average daily volumes in rupiah NDFs are $500-$700 million,
about half the volume of the offshore trade in China's yuan,
according to estimates by HSBC.
"It's not impossible that the market will just shift
elsewhere," said Cahyadi.
The rupiah, easily Asia's most volatile currency, is
a favourite with foreigners seeking high yields.
With more than 33 percent of Indonesian government bonds
held by foreigners, Indonesian authorities are well aware of the
need to attract investment and keep the currency stable.
Through 2012, as fickle global economic conditions and a
worsening current account deficit back home put downward
pressure on the rupiah, Indonesia's central bank stood
resolutely behind its currency, using a mix of moral suasion,
regulations and intervention to staunch volatility.
Implied volatility priced into rupiah options fell sharply
as a result, with one-month volatility now down to 5.5
percent, a third of levels in mid-2012.
There were unintended consequences too of Bank Indonesia's
tactics, which included heavy policing of the quotes Indonesian
banks gave for the rupiah and a strict rationing of scarce U.S.
Often, offshore markets would quote the rupiah 1 to 2
percent weaker than the onshore market. Fixings, the reference
rates for rupiah, also diverged, with dollar rates set by the
ABS often 50 to 150 rupiah higher than those
quoted by Bank Indonesia.
Typically, NDF contracts are net-settled in dollars. A
trader who'd bought a one-year contract a year ago would compare
the contracted rate with the spot fixing rate, and pay or
receive the difference.
If they started settling offshore contracts against an
onshore reference rate which is determined by a very different
set of flows and factors, traders would be exposed to the risk
of rupiah levels moving in a direction quite different from
Traders simply are not willing to stomach that risk. Even
Bank Indonesia's latest proposal, that of creating another
onshore rupiah benchmark that is based on market prices, isn't
assuaging those concerns.
"Dollar/rupiah fixing rates onshore are not always at the
market rate," said one analyst, who declined to be named. "The
fixing cannot be arbitrary. That would disadvantage the NDF
trader, exposing them to basis risk."
The changes to the way currency contracts in the Malaysian
ringgit are settled comes after months of investigations and a
review of the way Singapore-based banks set daily reference
rates for currencies such as the ringgit, Indonesian rupiah,
Thai baht and Vietnamese dong.
The reviews were ordered by Singapore's banking association
and triggered by a global scandal over bankers rigging benchmark
lending rates such as the London Interbank Offered Rate, or
The probes uncovered attempts by traders to manipulate
Singapore's rate fixings for certain currencies, fuelling the
ire of central bankers in Malaysia and Indonesia who say
Singapore's NDF market undermines currency controls that they
use to contain the pace of foreign money flows.
The Association of Banks in Singapore (ABS), which is
leading the effort to improve the process, is expected to adopt
a plan that would end the daily publication of a ringgit spot
price for settling forward derivative contracts, a person with
direct knowledge of the plans told Reuters last week.
Singapore media reported that banks in the city-state would
also stop setting the reference rate for the thinly-traded
Vietnamese dong NDF, though it's unclear what would replace
Traders in offshore ringgit markets appear apathetic to the
prospect of switching from a ABS-determined reference rate to
one determined by domestic Malaysian banks.
After all, switching to an onshore rate, which is the
underlying value on which derivatives are priced, will eliminate
the risk of divergence between the onshore and offshore rates.
(Editing by Alex Richardson)