The Financial Times story revealing that regulators in Switzerland, Hong Kong, the UK and US have starting probing foreign exchange markets, based on evidence that currency traders were rigging markets, is thin on details because the inquiries are still underway. Nevertheless, these investigations have the potential to unearth a Libor-level scandal. The allegations started with Barclays but appear to engulf many of the major players in the foreign exchange market.
Barclays has suspended six traders as part of its internal inquiry into alleged rigging of the foreign exchange market, including its chief currency trader in London, in the latest rate-manipulation scandal to hit the bank…
Authorities around the world – including those in Switzerland, the UK and the US Department of Justice – have opened preliminary investigations into whether some of the biggest banks in the world rigged the $5.3tn currency market.
Citigroup and JPMorgan on Friday became the latest banks to confirm they were working with regulators on investigations into foreign exchange trading. UBS, and Deutsche Bank have previously disclosed that regulators have asked them for information and Royal Bank of Scotland, which previously handed over instant-message chats to regulators, has suspended two traders in connection with the inquiry.
The probe originated with Swiss regulators and as this video indicates, the allegations appear to involve rate rigging in relationship to derivatives prices as well as separate allegations that traders were front-running customer orders.
This is the nub of the matter, :
Crucial benchmark rates in the mostly unregulated market are set based on transactions made during short windows of 60 seconds for the largest currencies. Regulators are investigating if traders colluded to move these benchmarks, although none have been formally accused of wrongdoing.
I’m hoping readers can clarify the relationship of spot FX pricing to derivatives pricing (as in how prices are specified in the contract in relationship to spot pricing or benchmarks, I infer that prices of some widely-used instruments are set in relationship to indexes). I did a Treasury study in the days of abacuses, in London for Citibank in 1984, which included spending a lot of time sitting with the interbank currency dealers and salesmen. The “rates are set every 60 seconds” or half hour isn’t a spot market concept.
Note that foreign exchange is an unregulated market. Nevertheless, price collusion, which appears to be the behavior alleged with the derivatives price fixing, is a straight-up antitrust violation, and in the US, is subject to criminal charges. And because these markets are massive, if the banks are found to have manipulated particular indexes, the amount of transactions affected have the potential to be very large, which in turn has the potential to produce lots of big-ticket customer lawsuits.
As Lambert likes to say, pass the popcorn.