Rigging currency markets
Bank, fix thyself
The Bank of England faces questions over its role in rigged forex deals.
ABOUT two dozen staff have so far been fired or suspended by banks for allegedly tampering with foreign-exchange markets.
The latest twist in the saga came from an unexpected quarter:
on March 5th the Bank of England announced that it too had suspended an official following an internal investigation.
Awkwardly, Britain's central bank has gone from inquisitor to a possible protagonist in the latest episode of financial-market chicanery.
Regulators globally have spent months investigating whether forex traders at big banks rigged global currency markets,
the world's largest, where turnover is over $5 trillion a day.
They suspect that bankers used their knowledge of what currencies their clients wanted to buy and sell to nudge market prices against them.
If so, it would be the latest in a long list of financial benchmarks that have been rigged in ways that have bolstered bankers' bonuses.
Fines are still pouring in over LIBOR, an interest rate used to peg contracts worth trillions, which traders fiddled.
A plausible defence from the bankers in the latest probe might be that they had told the Bank of England exactly what they were doing.
Minutes from regular meetings between the central bank and traders showed widespread concern about the structure of the currency markets as early as 2006.
All sides agreed that it was open to abuse because many clients,
from multinational companies to mutual funds with foreign holdings,
tended to buy and sell currencies from their banks at a single daily reference rate, the London fix, which is calculated using trades executed in 60 seconds of trading at 4pm in London.
That means rigging the market for just a minute could reap rich rewards.
A bank that had agreed to sell lots of Canadian dollars, say,
for a corporate customer could, in effect, depress that currency's price at the fix and so buy them for itself at a slightly lower price.
Bankers allegedly shared trading positions ahead of the fix, in internet messaging groups, among them The Cartel and The Bandit's Club.
Regulators think this is tantamount to fraud; banks have argued they were injecting order in an otherwise unworkable marketplace.
Notes taken by a trader at a meeting organised by the Bank of England in April 2012 suggest the traders had told the bank that they regularly shared information on forex positions.
According to Bloomberg, the central bank at least tacitly endorsed their attempts to match buyers and sellers,
purportedly to limit the volatility of everyone trading at the fix.
Discomfitingly, the bank explicitly said notes should not be taken at the meeting. Its own minutes reportedly shed no light on the matter.
The Bank of England denies it endorsed any wrongdoing.
After reviewing 15,000 e-mails, 21,000 chat messages and 40 hours of phone-call recordings, it said it had found no evidence its staff were privy to any collusion.
But one person at Threadneedle Street had breached rigorous internal control processes,
and others have been reminded of the importance of keeping accurate records and telling higher-ups when they hear something noteworthy.
A fuller investigation has been launched.
It is not the first time the central bank is painted as a conspirator in financial fiddling—or at least a tolerator of it.
In 2012 the then-deputy governor, Paul Tucker, had to flatly deny he had sanctioned duff LIBOR submissions by Barclays at the height of the financial crisis.
Chummy exchanges with Bob Diamond, at the time the boss at Barclays, made for awkward reading.
One potential problem for banks is that, unlike the people affected by LIBOR, it is easy for those who were fleeced by their forex bankers to figure it out.
Perhaps the most curious thing is the timing: much of the currency-market skulduggery happened after the banks had already come under investigation for LIBOR.
That suggests banks were slow to clean up the rotten culture on their trading floors,
or that they genuinely thought their colluding ways had been officially endorsed.