Traders at some of the world’s leading banks have reportedly engaged in manipulative practices to rig forex rates, according to a Bloomberg report.
Quoting five people having knowledge of the foreign-exchange market practice, Lim Vaughan, Gavin Finch and Ambereen Choudhury of Bloomberg reports the banks’ employees have been accused of rigging WM/Reuters rates before and during the 60-second windows when the benchmarks are set.
According to the report, dealers colluded with counterparts to boost chances of moving forex rates. The decade-long practice has reportedly been in vogue in the spot forex market, affecting the value of funds and derivatives.
Britain’s market supervisor, The Financial Conduct Authority, is reportedly considering opening a probe into the potential manipulation of the forex rates. The FCA is already working to review the integrity of benchmarks, including those used in valuing derivatives and commodities.
Three lenders were fined about $2.5 billion for rigging the London interbank offered rate, or Libor. The regulators have found that in an attempt to rig Libor, traders at Barclays PLC (NYSE:BCS) (LON:BARC), Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) and UBS AG (NYSE:UBS) misstated their firms’ cost of borrowing and colluded with counterparts at other banks to profit from bets on derivatives. The regulators are also investigating benchmarks for the crude-oil and swaps markets.
$4.7-trillion-a-day Forex Market
The currency market, with $4.7-trillion-a-day is the biggest in the financial system, though it is one of the least regulated.
Introduced in 1994, the WM/Reuters rates are extensively used by fund managers to compute the day-to-day value of their holdings and by index providers to track stocks and bonds in multiple currencies. The forex rates are also used in forwards and other contracts. The data for the WM/Reuters rates are collected and distributed by World Markets Co., a unit of Boston-based State Street Corporation (NYSE:STT) and Thomson Reuters Corporation (NYSE:TRI).
However, World Markets has indicated that it doesn’t guarantee the accuracy of its rates.
The rates are published for 160 currencies every hour and half-hourly for 21 of them. For the 21, the benchmarks are the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour. Some of the leading forex currencies such as British Pound to the South African rand are included in the 21 currencies.
State Street Corporation (NYSE:STT) in its email statement responded by stating the process of capturing the information and computing the spot fixings is automated and anonymous. The forex rates are monitored for quality and accuracy.
Draft principles for financial benchmarks were published in April by global regulators following the Libor scandal. State Street hired London-based Freshfields Bruckhaus Deringer LLP to ensure that the rates comply with these principles.
While bank estimates used to compute Libor, the benchmarks are based on actual trades or quotes, though they are still susceptible to rigging, according to five traders contacted by Bloomberg.
No Rules For Spot Forex Rates
Spot foreign-exchange transactions aren’t considered financial instruments in the same way as stocks and bonds. They fall outside the European Union’s Markets in Financial Instruments Directive, or Mifid, which requires dealers to take all reasonable steps to ensure the best possible results for their clients.
According to Srivastava of the Baker & McKenzie partner, while U.K. regulators require dealers to act with integrity and avoid conflicts, there are no specific rules or agencies governing spot forex trading in Britain or the U.S.
According to Euromoney Institutional Investor Plc, four banks dominate with the forex market capturing over 50 percent share. Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) tops the list with a 15.2 percent share, while Citigroup Inc (NYSE:C) has 14.9 percent, Barclays PLC (NYSE:BCS) (LON:BARC) with 10.2 percent and UBS AG (NYSE:UBS) with 10.1 percent share follow next.