GOLD TRADING FIRMS (Particulars)

Mr Yeo Choo Kok asked the First Deputy Prime Minister and Minister of Education (a) how many firms there are in Singapore trading in gold and how many have folded up; and (b) whether there are plans to license such firms and their brokers.

The First Deputy Prime Minister and Minister of Education (Dr Goh Keng Swee): Mr Speaker, Sir, there are two types of firms trading in gold. The first consists of members of the Gold Exchange of Singapore. There are 18 members of the Exchange and 17 associate members. In addition, there are a number of companies registered under the Companies Act who trade in gold not for physical deliveries but as speculative transactions. The exact number of these companies is not known but it is believed to be in the region of 40. Records in the Monetary Authority of Singapore show that three have closed down.

The gold market operates in two forms - the official market which operates during normal office hours and the unofficial market which operates at night. The official market, run by members of the Gold Exchange of Singapore, handles a trading volume of about 28,000 ozs a day. The unofficial market, run mostly by non-members, handles a volume of some 400,000 ozs a night, though some of these transactions are bogus as I shall explain later. It is the unofficial market which is the subject of concern.

The Registrar of Companies has no discretion to refuse registration to applications which ostensibly comply with the law. However, when it became evident that serious malpractices were taking place, a special legal device had to be resorted to. The Minister for Law, on the recommendation of the Monetary Authority of Singapore and the Attorney-General issued an order on 23rd September, 1982, designating 24 companies as "declared" companies under Section 195 of the Companies Act. This enabled investigations to be carried out on these companies.

Strictly speaking, matters of this kind fall under the purview of the Commercial Crimes Division of the Police. But because of the complexity of the subject, the services of the Monetary Authority of Singapore were sought. Four Inspectors were appointed by the Minister for Law, two from the Commercial Crimes Division and two from the MAS. On 29th September, the inspectors raided the premises of the 24 companies and took possession of their books and documents.

Preliminary investigations indicated that out of the 24 companies, five were already insolvent and 13 others, though not insolvent, were incurring losses. The investigations also showed that the methods of trading employed by these companies were questionable and could be detrimental to their clients' interest. The situation was further aggravated by the poor standard of internal controls in most of these companies. The inspectors are looking at specific companies in detail and reports will be put up to the Minister for Law as soon as sufficient evidence is collected to establish whether or not there is a case to wind up any of these companies.

As examination of the affairs of these companies is proceeding, I can give only a brief outline of the general picture. It is a sad story. People who have plenty of money apparently believe that their money can be entrusted unconditionally to others whose credentials they have not checked.

Mr Speaker, Sir, Members may not believe that Singaporeans are so trusting by nature but I assure them that the following extract from a contract between a client and a dealer is typical of business relations between them:

'The undersigned authorises Mr ABC as his agent and attorney-in-fact to buy and sell (including short sales) at any time and from time to time in his absolute discretion commodities, commodities futures and or options on margin or otherwise for the undersigned's account and risk. The undersigned hereby agrees to indemnify and hold you harmless from all costs due to losses (including legal) indebtedness and liabilities arising from all and any such dealings effected by the said Mr ABC on behalf of the undersigned which shall bind the undersigned absolutely.'

Members may be interested to learn how the business is conducted. Business is conducted, as I said, at night and is usually brisk at between 11 p.m. and 3 a.m., when most honest Singaporeans are fast asleep. The reason is that the big commodity exchanges in New York and Chicago are then open on the other side of the globe. The basic trading unit is 100 ozs of gold and a client must put up between 5% and 10% of the cost of whatever number of lots he wants to speculate on. For example, for ten lots (1000 ozs), at current market prices, the deposit comes to between $40,000 and $80,000 in Singapore dollars. The usual minimum deposit is $10,000. The trading rooms have telecommunication connections (e.g. Reuters or AP-Dow Jones monitors) with the US exchanges and the current gold prices are shown on visual display units. These companies also have telex facilities connecting them with their overseas trading parties.

Clients or their brokers take positions on the market - long or short. "Long" means you buy in expectation of a rise in the gold price; "short" means you sell in expectation of a fall. In neither case will you or need you ever be in possession of gold. You cover your position when you have decided you have made enough profit, or more likely, when you feel you have lost enough money for the night. Long positions are covered by sales, short by purchases. Whether you gain or lose, the broker gets his commission. Since he has discretionary powers, there is nothing to stop him from buying and selling several lots a night as this increases his commission which runs at US$40 per transaction of one lot.

I have said enough to convince Members that the present position is not satisfactory. Legislation to regulate the gold exchange had been under study in the MAS and a draft bill had been prepared as long ago as two years. Regulating the market requires much more than licensing of gold traders and their brokers. This is a complicated subject and I must over-simplify.

There are two ways of regulating the market - first by a regulatory body established by an Act of Parliament, second by a proper system of self-regulation. The Americans use the first method, the British, the second. Although the draft bill had been prepared a long time ago, I have hesitated in submitting it to the House. Let me explain the reasons.

Market regulation is not an end in itself but a means to an end. Here the end is a flourishing gold exchange but it is far from certain that legislation will promote such an end. A market consists of private traders and its growth depends on, among other things, their enterprise and their ability to innovate and take risks as well as to maintain a high standard of reliability. Government regulation can bring about the second feature - reliability, but there is a danger that bureaucrats may strangle the market at birth. Bureaucrats the world over place a high value on order, system, uniformity and equity. They do not feel at ease in situations demanding enterprise, innovation and risk-taking.

The second option, that is, proper selfregulation, appears to me a more attractive proposition, at least for a start. It will require joint action on the part of the MAS and the Gold Exchange of Singapore (GES). Such action could proceed along the following lines. First, when the examination of the 24 firms is completed, gold trading will be permitted only to those who are members of the Exchange. Those who are not members will have to apply to join the Exchange. Since traders will need access to telecommunications facilities, only accredited traders would be permitted to acquire and use telecommunications equipment for the purpose of trading in gold.

Second, the GES will have to prepare a set of regulations governing trading pracices for the approval of the MAS. These regulations will ensure that the present unfair relationship in the contracts between client and trader will cease. The enforcement of these regulations will be a joint responsibility of the GES and the MAS.

Third, the GES should establish institutional links between the Singapore Exchange and the New York or Chicago Exchange and other overseas exchanges.

There are other matters of detail, but the above sets out the main outline of a possible solution to the present sorry state of affairs in the gold market. This solution may well be an interim one and it could well turn out that in the end legislation would be necessary. In that event, the necessary laws will be enacted with the advantage of practice and experience which we do not now have.