As regulators in the world's top oil trading hubs move to tighten rules and boost transparency in opaque markets, Singapore may gain importance and liquidity as it stands by its pledge to let industry regulate itself. US President Barack Obama's administration moved on Wednesday to exert more control on over-the-counter (OTC) derivatives markets.
Proposing measures that could deter some of the oil sector's more lucrative trading practices, such as taking bigger or strategic positions in less liquid markets. But neither those plans nor a tepid call by Asian and Middle East energy officials for more oversight are likely to shake Singapore's trust in free markets.
Coupled with newly planned oil futures contracts and more OTC swaps clearing mechanisms, the lure of a more lightly regulated physical market could heighten the city-state's draw for investment banks, traders and oil companies who are betting that commodity trade will remain a bright spot, recession or no.
"To the extent that Singapore authorities seek to encourage liquidity by maintaining open access to the market and supporting clearing mechanisms, we believe this to be a positive step in enhancing the country's position as a commodity trading hub," said a senior trader with European oil trading firm Trafigura. Singapore officials say they see little use in following the United States in imposing sterner rules to check speculation and volatility, measures meant in part to assuage fears over investment funds' sway on prices when oil spiked last summer.
"In today's economic climate, there is a tendency to over-regulate market behaviour to gain short-term stability," said Chong Lit Cheong, Chief Executive of International Enterprise (IE), the state agency that manages the oil and commodities markets in Singapore. "However, this may not be desirable in the mid- to long term," he told Reuters via email last month. To an extent this approach reflects an acknowledgement that it would be hard to control a market in which much of the actual trade takes place well beyond Singapore's borders, although most major industry players base their trading teams here.
The latest measures by US federal regulators include subjecting all OTC derivatives dealers - whose trades are not made via an exchange - to "a robust regime of prudential supervision and regulation", including conservative capital, reporting and margin requirements.
While the growth of clearing houses that all but eliminate counterparty risk in OTC trades is viewed as a positive by most in the oil industry, many traders fret that related efforts to boost supervision and tightening up position limits could backfire by curtailing liquidity.
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