Forex probe – fx manipulation
Trading in foreign exchange, abbreviated as forex, involves huge amounts of money and financial transactions. Typically trading volumes in the forex market are $4.7 trillion dollars in a day. Any violation of regulatory norms is considered a forex scandal. After any forex scandal is detected the regulatory authorities in the affected country or countries will investigate the scandal, find out who is responsible, how rules were flouted, and penalize those guilty of violating the norms. This investigation into a forex scandal is called a forex probe.
Currency rigging definition
Currency price rigging or price-fixing or collusion is a very rare and illegal action of a market manipulation that occurs when parties conspire to fix or inflate currency prices to achieve higher profits at the expense of the consumer.
How forex rigging takes place
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 extremely suitable for financial institutions like hedge funds, banks that have access to a huge amount of money, to make quick profits by speculation. Though it was widely believed that the huge forex market, would make it difficult to manipulate it, a few major scandals have been detected. More details are provided for those who want more information on what is forex rigging.
The currency fix manipulation
What is fx fixing? A fix is a benchmark rate based on trades taking place in a given time window. For fixing, we have 3 roles: trading companies, dealers or brokers, and banks. When we have fx fixing than 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 to get a snapshot of the market activity. The benchmark for the forex rates are determined at 4 pm London daily, and they form 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 major currencies,
Worldwide trillions of 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. Forex traders may collide with each other 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. 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 found against them. However, the spot-forex market which has a daily turnover of two trillion dollars, and the forex market are largely 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. One of the reasons why there is no regulation is because the forex market size is so large, that it is considered extremely difficult for a trader or trader groups to manipulate the currency rates to increase or decrease them. However, the regulatory authorities, wish to prevent manipulation of prices and collusion. Traders can reduce their risk while placing orders if they collude with other traders. When the traders share the information they have with and take decisions to move the currency rates in the direction they wish, the risk is reduced when compared to letting market factors like supply, demand determines the rates.
One of the major forex scandals was related to Libor fixing. In this scandal, the journalists detected that the forex rates provided by the banks 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 noticed after analyzing the forex market data over a period of two years. It was noticed that on the last day of the month, surges were noticed 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 important 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 currencies that were pending, to make the forex market less volatile.
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 allegations that the traders colluded to manipulate the forex rate. The media reported that more than twenty forex traders who were 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. Another forex rate manipulation scandal was reported at the Bank of England.
The investigation is mainly focussed on the transcripts of the electronic chatrooms which are used by senior-level currency traders. In these transcripts, the traders discussed the volumes and the types of the forex trades which 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 the manipulation of the forex market, and repeatedly mentioned women, drugs, and alcohol.
Specifically, the regulators are specifically focussing on a small chatroom nicknamed the Mafia or Cartel which was very exclusive. Some of London’s most influential forex traders were using the chatroom, so many traders were trying to get access. Some of the members of the cartel were Richard Usher, Rohan Ramchandani, Matt Gardiner, Chris Ashton, who were highly placed in JP Morgan, Citigroup, Standard Chartered, Barclay respectively. Usher and Ramchandani were also the members of the group 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 which disclosed that they were investigated by the regulators. The senior currency traders at some of the banks like Citigroup, JP Morgan Chase and Barclays were either suspended or asked to go on leave. Deutsche Bank also cooperated with the investigators of the forex scandal, providing 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. Rohan Ramchandani was fired by Citigroup. Hundred of traders worldwide were probably involved in the forex scandal, according to Reuters.
The manipulation of the forex market by the 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. To date, the total losses caused due to the forex market manipulation are not determined to date.
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 fines totaled $1.7 billion and included fines of more than $300 billion each on Citibank, HSBC, JPMorgan, RBS and UBS. For a period of 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, keep client information confidential, and trading conduct.
So, How The Forex “Fix” May Be Rigged?
Instead of keeping their customer orders confidential, the banks misused the information for colluding with other unethical banks, and 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 total value $1.4 billion on the same five major banks. These fines were imposed for attempting to manipulate, helping and abetting the other banks in manipulating the global benchmark forex rates
Further in 2015, on 20 May, these five banks whose 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 amount of $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 the trust in the banking system and foreign exchange markets. In the UK, FCA announced that firms dealing with forex will have to make changes that will vary depending on the firm size, the share of the market, corrective measures implement and the role of the firm in the forex market. The corrective program recommends that the banks review their IT systems, especially those dealing with the spot forex market. At present, most of the banks are using older systems, where there are some data silos that can be manipulated, without being noticed by the compliance measures. Similarly in Switzerland, the financial regulatory authorities instructed UBS to take corrective measures, automate the forex trading, prevent conflicts of interests and also limit the variable pay for the forex traders.
The various forex scandals again prove that though the forex market is large and important, there is almost no regulation and no transparency, when compared to other financial markets. 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 real 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 scandals are detected, yet most traders are extremely wealthy and can easily pay the fines. However, these scandals adversely affect the reputation of the forex market