SIMEX (Protection against future crises)

Assoc. Prof. Walter Woon asked the Minister for Finance - in the light of the Minister's statement in Parliament on 1st March 1995 that SIMEX would appoint experts from the global futures industry to advise it on protecting itself against future crises like that involving Barings Futures - (a) what recommendations (if any) were made by the experts; (b) whether these recommendations have been implemented by SIMEX; and (c) what other steps (if any) have been taken by SIMEX to prevent a recurrence of the problems that caused the collapse of Barings Futures.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, in March 1995, SIMEX appointed an International Advisory Panel comprising experts from the global futures industry. They include Dr Wayne Angell, a former member of the Board of Governors of the Federal Reserve System, Mr John Gilmore, a former Chairman of the Chicago Board of Trade, Mr Michael Jenkins, the Chairman of the London Commodity Exchange, Mr Leo Melamed, the former Chairman of the Chicago Mercantile Exchange and Mr Jack Sandner, its current Chairman. They were appointed to advise on best practices in the futures industry worldwide that could be adopted to improve SIMEX's operations and systems and to enhance customer protection. The Panel concluded its study in October 1995 and made the following recommendations to SIMEX:

(i) To establish rules and evaluate those in place regarding customer protection with respect to proper margining of positions, segregation and trading floor practices;

(ii) To upgrade SIMEX clearing policies, systems and procedures to incorporate real-time clearing and settlement and critical risk management systems;

(iii) To establish confidential information sharing arrangements with mutual offset partners and other exchanges;

(iv) To establish a requirement for clearing members that a senior officer, who must be in a position of full authority for all business of the firm at SIMEX and related activities on other exchanges, be registered with the Exchange;

(v) To enhance SIMEX's Market Surveillance Department which is charged with responsibilities including monitoring market positions and their potential impact; and

(vi) To establish a comprehensive large trader reporting system which will enable the Exchange to determine the ultimate owner of large positions on SIMEX including those maintained in omnibus accounts.

In April 1995, SIMEX also appointed a consultant, Dr Roger Rutz, the former Chief Executive Officer of the Board of Trading Clearing Corporation, one of the world's largest clearing houses. He was asked to review SIMEX's clearing and settlement operations and its system for market surveillance so as to improve its clearing and risk management functions. The key measures recommended by the consultant included:

(i) Establishing a Risk Management Committee to oversee policies on capital requirements, financial and segregation requirements, position limits and reporting and clearing house systems;

(ii) Improving internal risk analysis procedures to identify accounts and members carrying large positions which may result in substantial losses, and perform tests on these accounts to determine the potential risk to both members and large account holders;

(iii) Performing detailed analysis of settlements and margin calls on clearing members on a daily basis;

(iv) Monitoring closely positions carried by clearing members and large accounts which constitute a high percentage of the positions in the market; and

(v) Upgrading computer systems to provide real-time, on-demand information for clearing processing and risk management.

SIMEX has adopted all the recommendations made by the Panel and its consultant. It has already implemented the majority of these recommendations and is in the process of implementing the balance, which involve software modifications or rule changes. In line with the recommendations, a new Regulatory and Risk Management Division within SIMEX has been created, comprising the Audit, Floor Compliance, Market Surveillance and Clearing House Departments. Staffing for the division has been strengthened from 48 to 68 members currently, and an eventual total of 78.

The steps being taken by SIMEX should enable it to monitor its risk exposure to large accounts and take the necessary action to contain these risks. This would minimise systemic risk arising from the failure of a firm having knock-on effects on other participants in the market. However, it should be emphasized that no regulatory system, however comprehensive, can guarantee that a firm will not fail as a result of fraud or excessive speculative trading.

Assoc. Prof. Walter Woon (Nominated Member): Sir, there were certain comments made by British authorities in the wake of the Barings collapse that they were not receiving full cooperation from the Singapore side, ie, from SIMEX or other authorities. Would the Minister comment on that?

Dr Richard Hu Tsu Tau: Who were making the comments?

Assoc. Prof. Walter Woon: There were some statements made. I believe the Chancellor of the Exchequer did say that.

Dr Richard Hu Tsu Tau: The comments relate to earlier investigations by the British Serious Fraud Office and by the Bank of England in the early stages of the Barings fiasco. There were legal technicalities which did not allow the Singapore authorities to provide comprehensive information and there was some mis-communication. I think these had been largely settled.

Assoc. Prof. Walter Woon: Sir, now that Mr Leeson has been convicted and sentenced, have the investigations into the Barings matter been closed or can we expect further prosecutions?

Dr Richard Hu Tsu Tau: Following from the Inspectors' Report, there were suggestions that other people might be involved with Leeson in the fiasco. The Commercial Affairs Department has been pursuing these leads and they are in the process of finalising their report. Let us wait for it. It should not be too long.