SGX has come a long way since Barings debacle

TWENTY-FIVE years ago, Nick Leeson, a 28-year-old head of derivatives at Barings Bank in Singapore, made more than US$1 billion in unhedged, unauthorised speculative trades, eliminating the merchant bank's cash reserves.

Britain's oldest investment bank, which was founded in 1762 and listed Queen Elizabeth II among its clients, was declared insolvent and ceased to exist in February 1995.

In charge of arbitrage trades involving contracts for the Japanese Nikkei 225 trading on both the Osaka Securities Exchange and the then Singapore International Monetary Exchange (Simex), Leeson manipulated internal accounting systems and falsified trading records in a bid to hide his losses from the bank's London headquarters.

The convergence of duties - with the same man at the helm of both the derivatives trading desk and the clearing, settling and accounting operation - was one of the most glaring regulatory errors the bank made.

Today, this would not be permitted. Financial institutions worldwide now have robust governance, risk management and compliance programmes. Independent committees and senior executives are tasked with overseeing such programmes.

In Singapore too, risk management practices and infrastructure have adapted since that time. And SGX has become one of the leaders in international markets.

A central clearing system means much more needs to be reported than ever before. It is also difficult for traders to take huge leveraged exposure.

SGX actively communicates with those in its community and proactively manages liquidity and market risks, through prudent and transparent clearing and settlement.

It is also host to world class trading engines, which have attracted flight-to-quality investors as well as those looking to hedge their portfolios as market volatility increases.

In fact, SGX is now better prepared to deal with volatility and risk. Its system capacity has the necessary overhead to accommodate volume surges and unexpected market events.

The Philippines on March 17 halted stock, bond and currency trading until further notice, becoming the first country to shut financial markets in response to the widening coronavirus pandemic. But SGX's Philippines derivatives market had well-rehearsed procedures to assure its investors and participants of seamless management and uninterrupted settlement.

Indeed, even as commentators have clamoured for temporary market closures and trading halts amid the Covid-19 pandemic, SGX steadfastly maintains it is paramount that its markets stay open and accessible during crises. Shutting markets during times of crisis is extremely rare, and not without controversy. Investors may not take kindly to their flows of funds being restricted and denied an exit mechanism.

Today's SGX has ample safeguards for unexpected idiosyncratic risk events in its trading, clearing and settlement infrastructure. These range from circuit breakers, advance surveillance capabilities, strong broker supervision, ample liquidity in its clearing house, strong collateralisation of risk exposures and one of the highest skin-in-the-game capital contributions of any clearing house in the world, SGX's head of equities and derivatives Michael Syn told The Business Times in a recent interview.

SGX also boasts the longest trading hours in Asia in its derivatives markets, allowing for market shocks and news events to be properly absorbed. This helps minimise the risk of a build-up of frustrated or unexpressed risk positions.

Given the heightened volatilty and stress caused by the Covid-19 pandemic, and with news flowing across time zones from the Asian session to the European session to the US session, these longer hours are particularly relevant.

Singapore's market stays open past the US market's closure, capturing a full day of market movement information in SGX's Asian product suite.

Learning from past crises, the present day SGX has evolved and has armed its systems and methods of risk-management precisely to anticipate these kind of stresses.

Of course, other exchanges around the world have evolved significantly over the last 25 years too. SGX will have to stay proactive in updating its market and regulatory infrastructure so that it is ahead of the curve.

There is no room for complacency in the fight against systemic risks, especially with the world so connected and technology interconnecting systems. Who knows where the new source of risks will emerge from?

Twenty-five years after the Barings crisis, SGX, like most global exchanges, has spent resources to prevent cyber and terror attacks. No one had anticipated a global health nightmare. Covid-19 may be one such source of risks and one more test for the exchange to overcome.