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Michael Dwyer

The bartenders at Harry's Bar, a popular pub on the banks of the Singapore River, serve up a mean cocktail named after rogue trader and former regular Nick Leeson.

But 10 years after Leeson brought down Britain's oldest merchant bank by gambling away #862 million ($12.83 billion), Singapore's financial regulators don't have all that much time to imbibe the aptly named Bank Breakers.

Officials from both the Singapore  Exchange (SGX) and the Monetary Authority of Singapore (MAS) have instead spent most of the past three months dealing with another financial scandal that could jeopardise Singapore's role as a regional financial hub.

In early December last year, China Aviation Oil (Singapore) Corp (CAO) sought court protection after raking up losses  of US$550 million through speculative trading  in oil derivatives.

SGX and  MAS officials have been quick to reassure CAO's 7,000 or so small shareholders that the Singapore government is prepared to change the law if that is what is required to protect their  interests.

Yet, a far more difficult task  will be the creation of a regulatory environment that would prevent financial scandals like the collapse of Barings Bank and CAO's massive derivatives losses.

Randall Dodd, who runs the Derivatives Study Centre at the Washington-based think tank Financial Policy Forum, says it can be very difficult for governments to regulate against such rogue trading.

'The rogue trader problem must be solved by having proper internal controls,'  said Mr Dodd, who served as a senior official with the Commodity Futures Trading Commission (CFTC) in the United States  in the late 1990s.

He said that trading just  made poor internal controls a much greater potential danger: 'Most participants in the derivatives markets are sophisticated, although some are significantly more sophisticated than others.

'The difference can create problems from fraud and market manipulation. Regulators are savvy to some issues but do not have the resources and access to information to do a thorough job.'

The collapse of the 230-year-old Barings Bank a decade ago certainly brought a quick response from both national governments and  companies that were potentially at risk.

In  Britain, the Barings Bank disaster led to the creation of the country's Financial Services Authority (FSA), which brought together  nine separate regulators under one government  agency.

Investment banks also significantly beefed up their compliance departments and set in place far more rigorous risk management.

Yet, even with the most rigorous of risk management systems in place, it seems highly unlikely that financial scandals caused by rogue trading will ever go away.

In February 2002, Allied Irish Banks revealed that it was investigating a US$690 million currency fraud at its Baltimore subsidiary involving forex trader John Rusnak.

In late 2003, the National Australia Bank also admitted it was facing losses of about A$185 million ($1.13 billion) as a result of unauthorised foreign currency trades.

In the aftermath of the CAO scandal in Singapore, both the SGX and the MAS have been very defensive of their own regulatory record.

Singapore authorities point to the Securities and Futures Act (SFA)  introduced in 2002, which has significantly strengthened  disclosure, accounting and corporate governance rules.

But critics argue that the SFA still lacks teeth. 'We do have the necessary framework in place in terms of updated securities legislation dealing with false or misleading statements, continuous disclosure of material information by listed companies and insider trading,'  said Mak Yuen Teen, the co-director of the Corporate Governance Centre at the National University of Singapore.

'There are civil penalties, criminal penalties and civil liability for contravention of provisions in the SFA,' Mr Mak  said.

'But strong enforcement is necessary, not only in cases that reach the status of a corporate scandal like CAO, but in other cases of lax or misleading disclosures that do not result in corporate failure.'

Another potentially big problem facing Singapore lawmakers is that most of the transactions that have made it a regional hub for oil trading are conducted overthecounter (OTC) rather than through an official exchange.

The  government has in the past been actively encouraging this type of OTC derivatives trading.

'OTC markets are largely unregulated,'  said Mr Dodd. 'No one knows the open interest. No one has full knowledge of prices.'

By comparison,  exchange-traded derivatives  were well-supervised and there  were reporting requirements that  could help detect and deter manipulation, he said.



Caught between risk and a hard place