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Handling $266 billion a day

Someone I know, who wanted to send dollars to her son studying in America, had to explain to her bank in Kolkata why she was sending the money. No questions asked in Singapore. You just have to give the recipient’s name, bank account number and the routing number of the bank where the money is to be sent.

Singapore is the world’s fourth biggest foreign exchange centre, according to the Bank for International Settlements in Switzerland. Its latest report shows Singapore’s average daily foreign exchange turnover is – hold your breath – $266 billion. That’s more than the Indian government’s annual revenue of Rs 682,212 crore, according to the 2010-2011 budget estimates. And if that sounds humongous, you ain’t heard nothing yet.

Worldwide foreign exchange transactions every day, on an average, total $4 trillion. Can you imagine all that money changing hands every day? That’s more than the gross domestic product of almost every country. Only three countries produce that much of goods and services in an entire year: America, China and Japan.

No, the world isn’t short of money: only countries and people are. So India runs a budget deficit, America has a $13 trillion national debt, and you see beggars on the streets in many countries every day.

That’s life – millions starve while trillions of dollars change hands every day.

And the funny thing is, some of the players don’t even have a fraction of that money. Singapore certainly doesn’t. The $266 billion of foreign exchange transactions it handles every day exceeds its entire annual economic output. Singapore’s gross domestic product last year was S$247.3 billion ($184 billion). Its foreign reserves total $200 million.

Obviously, not all the money changing hands is local.

Every international financial centre attracts its share of foreign money.

Britain is the biggest forex market, handling $1.8 trillion every day; America, second, with $904 billion; Japan, third, with $312 billion. Then comes Singapore, followed by Switzerland (S262.6 billion), Hong Kong ($237.6 billion) and Australia (S192.1 billion).

India trails far behind, with an average daily forex turnover of just $27.4 billion, about a tenth that of Singapore.

Not that India is short of cash. The companies listed on the Bombay Stock Exchange alone have a market capitalization of $1.28 trillion – almost 2 ½ times greater than their counterparts on the Singapore Exchange ($483.8 million).

The stock options may be limited, but there are other ways to make a bundle or lose your shirt in Singapore. It has attracted hedge funds and built up a derivatives market. Britain’s oldest merchant bank, Barings, went bust because of a rogue trader, Nick Leeson, who lost millions of pounds on futures contracts in Singapore. Now the city-state, which has no natural resources and imports even chickens and eggs from neighbouring countries, is gunning for the metals and commodities trade. And it is getting help from India.

The Singapore Mercantile Exchange, which has just opened for trading in currency and commodity derivatives, is backed by Financial Technologies (India), a company founded by Vignesh Shah. He is the vice-chairman of the exchange.

Singapore’s growing financial sector is attracting foreigners. The 2010 census shows the number of permanent residents has doubled to more than 541,000 in the last decade, and now 20 per cent are Indians, up from 15 per cent in 2000.

But where does all the money go, changing hands in the $4-trillion-a-day global forex market? No clue is offered by the Bank for International Settlements. It merely notes that spot transactions – buying one currency with another for immediate delivery – total almost $1.5 trillion a day. Foreign exchange swaps – which involve exchanging the principal and interest in one currency for the same amount in another currency – run to more than $1.76 trillion a day. “Outright forwards”, or forward contracts to buy and sell at a certain price on a specific date, account for another $475 billion a day. The rest of the turnover – more than $250 billion a day – involves other kinds of deals.

It’s all very arcane, but one thing is clear. Everybody needs dollars. China is trying to shake up the system, calling for a new global reserve currency, and promoting trade and investment in renminbi. But there is no rush yet to do business in other currencies, least of all in the Chinese renminbi. Its share of the forex market has actually fallen, from 0.7 per cent three years ago to 0.3 per cent.

The Indian rupee has a bigger share, up from 0.7 per cent to 0.9 per cent, and so does the Singapore dollar, up from 1.2 per cent to 1.4 per cent. But the dollar reigns king, with 85 per cent of the foreign exchange transactions still done in greenbacks. The euro is second, with a 39 per cent market share, and the Japanese yen third, with 19 per cent, followed by the pound sterling (13 per cent). Yes, the numbers add up to more than 100 per cent. The report explains why: “Because two currencies are involved in each (forex) transaction, the sum of the percentage shares of individuals totals 200 per cent instead of 100 per cent.”

Go, figure. Even the arithmetic is different. No wonder not everyone is a George Soros. But one thing you do know. Wouldn’t a raise be nice?

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