South East Asian central banks are in talks to overhaul the way reference rates for offshore currency derivatives are set following investigations by banks in Singapore that found traders in the city-state tried to manipulate the market, the president of Indonesia's foreign exchange industry group said.
The discussions show heightening concerns at central banks in Indonesia and Malaysia over Singapore's market for non-deliverable currency forwards (NDFs), which they say has undermined foreign exchange controls.
The central banks are now using the manipulation probes to try to push for reforms and for more control over a rate-setting process now overseen by the local banking association in Singapore.
"The central bankers - Singapore, Indonesia, Malaysia and others in the region - are having a series of discussions and coordination regarding how to handle the situation," said Panji Irawan, the president of ACI Indonesia, the country's foreign exchange industry group, who had first-hand knowledge of the talks.
A banker familiar with a Singapore review of the NDF rate-setting process has said it was likely to adopt reforms and tighter regulation similar to those planned in response to manipulation of the London interbank offered rate (Libor).
Bank Indonesia said on Wednesday it is coordinating with other central banks about the issue but gave no details.
NDFs are derivatives that allow speculation in or hedging of emerging market currencies that cannot be traded directly or freely due to exchange controls.
They are settled in dollars so there is no exchange of the underlying currency, but because they reflect investor expectations on the direction of a currency, they can influence onshore trading.
Since NDFs are traded offshore, the central banks have no regulatory control over the Singapore market.
But the news on manipulation has presented them with an opportunity to pressure Singapore to change a foreign exchange market that has frustrated central banks since its inception nearly two decades ago.
"Everybody is saying they need to make a better system and a better instrument that follows supply and demand, not an engineered rate, as it has such an impact on the real exchange rate in the cash market," Mr Irawan added.
"The central bankers are coordinating and I think a kind of alignment will be seen very soon."
Reference rates used to determine the settlement price of NDF contracts in the Indonesian rupiah, Malaysian ringgit and Vietnamese dong are set in Singapore by panels of banks overseen by the local banking association.
Singapore's central bank ordered the banks on the pricing panels to review the fixing process last year as US and British regulators cracked down on manipulation of the Libor, a benchmark used to set interest rates for around $600 trillion worth of securities.
A source with knowledge of those reviews told Reuters they uncovered evidence that traders from several banks were communicating with each other in an attempt to manipulate the rates to boost their trading books.