Trading in foreign exchange, abbreviated as forex, involves enormous amounts of money and financial transactions. Typically trading volumes in the forex market are 4.7 trillion dollars in a day.
What is Forex probe – fx manipulation
The forex scandal or forex probe is a financial currency scandal involving the revelation and subsequent investigation that banks or large financial institutions conspired to manipulate exchange rates for their financial gain. After any forex scandal is detected, the affected country or countries’ regulatory authorities will investigate the scandal, determine who is responsible, how rules were flouted, and penalize those guilty of violating the norms.
Currency rigging definition
What is forex rigging?
Currency price rigging, price-fixing, collusion, or forex rigging is a sporadic and illegal action of market manipulation that occurs when parties conspire to fix or inflate currency prices to achieve higher profits at the expense of the consumer.
The Bank of international settlements in 2013 conducted a survey, which indicated that the daily turnover was approximate $5.35 trillion. Most of the transactions in the forex market are speculative trades since the currency rates are constantly fluctuating. This makes it highly suitable for financial institutions like hedge funds and banks with access to vast amounts of money to make quick profits by speculation. Though it was widely believed that the enormous forex market would make it difficult to manipulate it, a few significant scandals have been detected. More details are provided for those who want more information on what forex rigging is.
The currency fix manipulation:
How forex rigging takes place? What is fx fixing?
A fix is a benchmark rate based on trades taking place in a given time window. For fixing, we have three roles: trading companies, dealers or brokers, and banks; when we have fx fixing, banks guarantee their clients (trading companies) the market mid-rate (mid-rate between the bid and ask price).
Since the forex market is always open, banks and other traders would like a snapshot of the market activity. The forex rates benchmark is determined at 4 pm London daily, forming the closing currency fix. These benchmark rates are called the WM/Reuters rates and were calculated based on the sell and buy forex transactions by the traders in the interbank forex market during a window of total duration sixty seconds, thirty seconds before, and thirty seconds after 4 pm. The median values of all the forex trades which take place during the one minute period are used to determine the benchmark rates for twenty-one significant currencies,
Worldwide, trillion dollars are invested in pension funds and $3.6 trillion in index funds controlled by money managers. The value of these investments depends to a large extent on the benchmark rates. As a result, forex traders may collide to set the benchmark rates at artificially high or low levels to increase their profit. However, this profit is at the expense of investors like pensioners, who lose some money.
Collusion using instant messaging for manipulation.
In one of the biggest forex scandals, the two main allegations against the forex traders are discussed below.
– Forex traders are colluding by sharing proprietary and confidential information like pending orders from clients just before the fixing time of 4 pm. Instant messaging (IM) groups or chatrooms with memorable names like the cartel or mafia were used to share the information. However, access to these groups was closely controlled, and only a few of the senior traders in some of the largest banks dealing in forex could access these groups.
-“manipulating the close” was used to describe the selling and buying of currencies during the sixty-second window fix, using the orders from clients, which the traders had received earlier, to manipulate the forex rate.
These manipulative methods are similar to front running for ensuring a higher closing in the stock markets. Since these practices are prohibited in the stock market, the trader will be penalized if the evidence is against them. However, the spot-forex market, which has a daily turnover of two trillion dollars, and the forex market are mainly unregulated. While almost all financial products are subjected to stringent rules and regulations to prevent fraud, worldwide selling, buying currencies for delivery immediately is not considered an investment, so the regulatory authorities do not monitor any manipulation.
Risk in forex
Front running by forex traders is not considered illegal. There is no regulation because the forex market size is so large that it is considered extremely difficult for a trader or trader to manipulate the currency rates to increase or decrease them. However, the regulatory authorities wish to prevent the manipulation of prices and collusion. Traders can reduce their risk while placing orders if they collude with other traders. When the traders share their information and decide to move the currency rates in the direction they wish, the risk is reduced compared to market factors like supply; demand determines the rates.
Forex scandals
One of the significant forex scandals was related to Libor fixing. In this scandal, the journalists detected that the banks’ forex rates were similar during the financial crisis in 2008. Bloomberg News first reported the benchmark rate scandal in June 2013, after price surges were noticed just at the time of the fix at 4 pm. The scandal was seen after analyzing the forex market data for two years. It was noticed that on the last day of the month, surges were detected in the forex rates for at least 14 major currency pairs.
These differences were noticed about half the time for popular currency pairs like Euro/Dollar. The exchange rates at the end of each month are essential since they are used for determining the net asset values for mutual funds and other assets. It should be noted that officials at the Bank of England were aware of the market manipulations since 2006. The forex traders were also told by the officials that there were allowed to share information regarding the orders for pending currencies, making the forex market less volatile.
Forex rigging penalties
The financial regulatory authorities in various countries like the FCA in the UK, European Union, Department of Justice in the United States, Switzerland investigated the traders’ colluding to manipulate the forex rate. The media reported that more than twenty forex traders employed in some of the largest banks dealing with foreign exchange were affected. These traders working with reputed banks like Deutsche Bank, Citigroup, and Barclays were either suspended, fired, or asked to go on leave while the investigation was carried out. In addition, another forex rate manipulation scandal was reported at the Bank of England.
Fx Investigation
The investigation mainly focuses on the transcripts of the electronic chatrooms used by senior-level currency traders. In these transcripts, the traders discussed the volumes and the types of forex trades they were planning to place with their competitors from other banks. These chatrooms had different names like The Bandits Club, The cartel, One team, one dream, and the Mafia. In addition to discussing the forex trades, the traders also joked about manipulating the forex market and repeatedly mentioned women, drugs, and alcohol.
Specifically, the regulators focus on a small chatroom nicknamed the Mafia or Cartel exclusive. Some of London’s most influential forex traders used the chatroom, so many traders were trying to get access. Some cartel members were Richard Usher, Rohan Ramchandani, Matt Gardiner, and Chris Ashton, who were highly placed in JP Morgan, Citigroup, Standard Chartered, and Barclay. Usher and Ramchandani were also the groups of chief dealers of the Joint Standing committee of the Bank of England, which had thirteen members.
Barclays, Goldman Sachs, and HSBC were some of the 15 banks that disclosed that they investigated them. As a result, the senior currency traders at some banks like Citigroup, JP Morgan Chase, and Barclays were suspended or asked to leave. Deutsche Bank also cooperated with the investigators of the forex scandal, providing the information required. By June 2014, UBS, Standard Chartered, RBS, Lloyds, JP Morgan Chase, HSBC, Deutsche Bank, Citigroup, Barclays, Bank of England had either fired, suspend, or sent on leave at least forty forex employees. Citigroup fired Rohan Ramchandani. Hundred of traders worldwide were probably involved in the forex scandal, according to Reuters.
The manipulation of the forex market by rogue traders affected customers worldwide for more than one decade. Sources indicate that the financial losses caused due to the manipulation of the forex rates, the market is estimated at $11.5 billion yearly for the 20.7 million pensioners in Britain. However, to date, the total losses caused due to the forex market manipulation are not determined.
Foreign exchange manipulation – Fines & other penalties
In 2014, on November 12, the Financial Conduct Authority in the United Kingdom, abbreviated as FCA, imposed fines on five banks for their unethical business practices in their G10 spot forex trading. The penalties totaled $1.7 billion and included more than $300 billion each on Citibank, HSBC, JPMorgan, RBS, and UBS. For more than five years, ten months, and 15 days starting January 1, 2008, FCA found that the banks had violated regulatory norms regarding conflict of interest, kept client information confidential, and traded conduct.
How The Forex “Fix” May Be Rigged?
Instead of keeping their customer orders confidential, the banks misused colluding information with other unethical banks. As a result, they manipulated the forex currency rates, illegally increasing their profit, exploiting their customers and market.
On the same day, in the United States, the regulatory body Commodity and Futures trading commission (called the CFTC) coordinated with the FCA to impose fines of a total value of $1.4 billion on the same five central banks. These fines were imposed to manipulate, help, and abet the other banks in manipulating the global benchmark forex rates.
In 2015, on 20 May, these five banks that faced felony charges by the Department of Justice in the United States also pleaded guilty to these charges. These banks agreed to pay fines of approximately $5.7 billion. Bank of America was not found guilty. However, it was asked to pay a $204 million fine for its unsafe trading practices in the forex markets. On 18 November 2015, Barclays was also fined an additional $150 million for its misconduct using the automated electronic systems for foreign exchange. In December 2014, one former RBS trader was arrested.
Forex probe and reforms
After the forex probe was completed, regulatory authorities in various countries have announced measures to prevent similar scandals in the future and increase trust in the banking system and foreign exchange markets. For example, in the UK, FCA announced that firms dealing with forex would have to make changes that will vary depending on the firm size, market share, corrective measures implement, and the firm’s role in the forex market. The corrective program recommends that the banks review their IT systems, especially those dealing with the spot forex market. Most banks use older systems, where some data silos can be manipulated without being noticed by the compliance measures. Similarly, in Switzerland, the financial regulatory authorities instructed UBS to take corrective actions, automate the forex trading, prevent conflicts of interest, and limit the variable pay for the forex traders.
Conclusion
The various forex scandals again prove that though the forex market is large and vital, there is almost no regulation and transparency compared to other financial needs. Financial experts are questioning the risks involved in giving a small group of closely connected individuals great powers to control the exchange rates, which affect the actual value of investments, assets worth trillions of dollars. Some countries like Germany are proposing that the forex exchanges are regulated. Usually, the regulator will impose fines when detected scandals, yet most traders are extraordinarily wealthy and can quickly pay the penalties. However, these scandals adversely affect the reputation of the forex market.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
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