Sunday, March 9, 2014

Forex Becomes the Focus of Global Investigations

Who Knew? And When Did They Know it?

Amid allegations of widespread collusion and corruption amongst forex traders, regulators all over the globe have launched investigations in to the the lucrative $5.3 trillion daily foreign currency exchange market.  With British firms handling 41% of all currency trades, London is the focus of many of these investigations.  In contrast to other financial scandals like the LIBOR rate scandal, forex trading firms have taken an active self-policing role and launched internal investigations of their own, with at least 20 forex traders being suspended or terminated as a result.  Royal Bank of Scottland, UBS, RBS, Citigroup, Deutsche Bank, JPMorgan, Goldman Sachs, and Lloyds Banking Group have all vowed to assist regulators in investigating wrongdoing, and 10 banks have handed forex trading data to the Financial Conduct Authority (FCA).  In addition, each has instigated new internal policies aimed at preventing collusion amongst currency dealers at rival firms.  

It was recently revealed that the forex price fixing scandal extends beyond the trading firms, however. The Guardian reports that the Bank of England may have been aware that groups of forex traders at the various firms were manipulating the forex market by exchanging information about their clients’ positions.  

The latest twist in the unfolding saga – already the subject of investigations by regulators around the world – puts the focus on a meeting between key officials at the [Bank of England] and leading foreign exchange dealers in April 2012, when they discussed the way they handled trades ahead of the crucial setting of a benchmark in the prices of major currencies. This benchmark is used to price a wide variety of financial products and is the subject of regulators' attention amid allegations that traders at rival banks were sharing information about their orders from clients to manipulate the price.  The Guardian alleges that the Bank of England officials at the meeting did not believe that it was improper to share customer orders. 

The FCA has opened an investigation into this meeting, and Martin Wheatley, head of the FCA has stated that these allegations were “every bit as bad” as those involving the LIBOR fixing scandal.  This investigation, and similar investigations being conducted in the US and Switzerland, are not expected to conclude before year-end. 

Unwilling to wait for the results of the FCA's probe, the UK Parliament is calling for reforms including stronger sanctions for personnel responsible for lapses in standards and changes in the compensation structures for traders to remove incentives to manipulate the forex markets.