Macau Gaming Law series part 4: Does the chip cap need a rethink?

Welcome to the fourth in a series of articles on the Macau gaming law IAG is publishing throughout the month of March and in early April:

Almost everyone connected to the Macau gaming industry has heard of the infamous table cap – it was the catalyst for innovations such as the LT Game stadiums where 50 players betting at electronic stations on a game dealt nearby with real cards counted as just one gaming table, and the so-called siamese tables at the then-Sands Cotai Central (now Londoner) where two baccarat tables were joined at the hip so they would count as one.

But Article 22D of the new draft Macau gaming law has introduced a new cap concept – the chip cap. Article 22D (1) reads, “Concessionaires must obtain permission from the Gaming Inspection and Coordination Bureau before they can purchase chips,” while article 22D (2) reads, “The number of circulating chips must be approved by the Secretary of Economy and Finance, and a maximum number of circulating chips may be set.”

I think I am safe in assuming the policy objective behind these provisions is management and control of the outstanding chip liability. The outstanding chip liability is one of the lesser-known ways casinos make money. Players will purchase chips, and then for a variety of reasons simply not cash them in – allowing the casino to keep the money! The reasons are many and varied, for example some players like to keep chips as souvenirs or gifts. Some players physically lose chips. I am still holding on to an AU$5,000 chip I purchased from Crown casino in Melbourne in the 1990s, merely because it has the serial number “00002” on it! I sometimes muse about who on earth got 00001 …

As the years roll by, this outstanding chip liability simply grows and grows. Imagine how large it must be for SJM, which took on the outstanding chip liability of STDM. They started issuing chips in the early 1960s! Casinos which have operated for many decades may not even know the amount of their outstanding chip liability as the records could be lost to time.

This can be a problem for regulators and governments, as they are concerned that as the outstanding chip liability grows the operators may not be able to cover the liability, or at least not have enough cash on hand at the casino cage to immediately cover it.

However, limiting the number of chips that concessionaires issue may not be the best way to address the problem. This is because the number of chips, or more precisely the total value of chips a casino issues, is absolutely a function of player demand, and nothing else. Casinos will, or at least should, issue the total value of chips they need to – no more, no less.

Why would a casino issue more value in chips than it needs to? It doesn’t make sense. Chips are very expensive – and getting more expensive in modern times with the introduction of RFID chips and improved security measures to combat forgery. In fact, I am aware of one casino that probably should change its name but one of the reasons it doesn’t is the expense of re-issuing all their chips! Also, if a casino issued more value in chips than it needs to, it must store all those extra chips somewhere, and they become a security risk. The best way to stop chips being stolen is for them not to exist – that’s foolproof!

Why would a casino issue less value in chips than it needs to? It also doesn’t make sense. Imagine a player walking up to a table or the cage, handing over cash to purchase chips, and being told, “Sorry sir, we can’t give you any chips to play with because we’ve run out. You’ll just have to wait until someone else cashes in their chips.” Not a very likely scenario!

Here’s another problem. Article 22D says, “… a maximum number of circulating chips may be set.” Did you notice it? It refers to the number of chips, not the value of chips. If I’m a concessionaire, what’s to stop me taking a thousand HK$1,000 chips out of commission, and replacing them with a HK$1 million plaque? I’ve reduced the number of chips by 999, but the value of chips outstanding remains the same. Sure, I may have less “working” chips to deal the game with, but I’ve successfully side-stepped the chip cap.

If the policy objective of the chip cap is to ensure the concessionaires can adequately cover their outstanding chip liability, why doesn’t the gaming industry simply look to the banking industry? They’ve been dealing with this type of problem for years by creating prudential regulations whereby each bank is required to have adequate capital on hand – usually a ratio of the amount of customer deposits outstanding. The idea is to provide sufficient capital to handle a “run on the bank,” something we’ve been seeing in Russia in recent days with long lines of citizens at ATMs, trying to withdraw their funds.

By introducing similar prudential rules for concessionaires, the government can be confident the concessionaires will have enough funds on hand to cover the outstanding chip liability, while avoiding the unintended negative consequences a chip cap may create.

The fifth article in this series will be published in a few days.

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