What they did not guess, however, was the size of those losses. After all, aside from a rushed share placement, CAO was still a vigorous market participant, with ambitious plans for strategic investments in China and abroad.

"The market was speculating the losses might be US$50m-US$100m - then it comes out at half a billion dollars," says Esa Ramasamy, director of Asian oil markets reporting at energy information service, Platts.

That one company was able to accumulate such huge positions without its peers knowing has led to questions about whether Singapore's oil trading business should be better regulated.

It is an issue that has implications beyond Singapore. CAO's default sparked unexpected selling in the New York and London futures markets as the company's counter-parties sought to offset unwanted positions, according to Petroleum Intelligence Weekly, an industry newsletter.

The health of Singapore's oil trading industry, Asia's largest, is critical to the city state's future. Singapore's physical oil trade, established in the late 19th century, was last year worth about US$104bn, according to the Ministry of Trade and Industry.

Mr Ramasamy says the swaps trade is typically seven to 10 times the volume of the physical market, with hedging of positions accounting for about 40 per cent of this and speculation the remainder.

With its potentially high profits, the speculative trade is what gives the business its vibrancy - straight hedging on physical commodities is a low-margin business.

But the industry is also not transparent. Contracts are traded over the counter between companies and brokers rather than through an exchange.

While each company can limit its exposure to any individual counter-party, there is no way for the market to keep track of a single group's overall position.

"If you call everybody in town and you ask them a price, obviously you can carry a big position with a lot of people," says one Singapore oil trader.

One way to tackle this problem might be to introduce a clearing house, which would be better able to keep track of each participant's total exposure.

Indeed, the New York Mercantile Exchange (Nymex) and Singapore Exchange are discussing setting up an energy futures market in the city, although nothing has yet been decided.

"The same sound regulatory infrastructure which we have already had in place for our markets will be extended to the proposed new energy futures market," the SGX said last week.

Traders, however, are naturally suspicious of any moves towards greater regulation or even to set up a clearing house, which would involve costs of its own.

"If you have a clearing house you have to put money into it and if someone defaults, you lose some money anyway," says the Singapore trader.

Most see the CAO scandal as entirely a corporate governance matter.

As a listed company, CAO was subject to the SGX's rules on disclosure yet it was still able to quietly rack up losses.

"If you had all kinds of regulations and somebody wanted to breach them, they can still go ahead and do it," says another dealer.

For Singapore's authorities the issue presents a dilemma familiar to regulators everywhere - how to avoid a recurrence of market reputation-damaging scandals such as CAO's while not stifling an important industry.

There are unlikely to be any easy answers.

"They need to sit down with industry players and see how they can tighten the screws," Mr Ramasamy says.

"But what happens is when you tighten the screws, liquidity tapers off."

                                                      Home