The Foreign Exchange Market Paying the Price of Laxity

Bank of England, the Royal Exchange and the Wellington statue in

The international scandal about manipulation of the currency market continues to grow. The suspension of six traders, announced by Barclays on Friday, November 1, bringing the number of traders in the currency market laid off in the City of London to a dozen. Besides the British bank, JPMorgan, UBS, Citigroup and Deutsche Bank are now under investigation by OLAF in the UK, the US, Switzerland and Hong Kong. Monday, November 4, the giant HSBC also announced to be under investigation.

At the heart of the case there is suspicion of unlawful agreement between traders who have used discussion forums on the Internet to influence the daily reference rate, according WM / Reuters. This tool is determined at intervals for 160 currencies, by calculating the median of the transactions for sixty seconds. In particular, the police are interested in the most used market rates, calculated at 16 hours on the foreign exchange market in London. The relevant transactions have taken place in recent years, presumably after the financial crisis of 2007-2008.

The bomb effect

The City is the first bank in the world in terms of trading forex, a fully globalized market that takes place twenty-four hours a day. According to the triennial report of the Bank for International Settlements, published on September 5, trade in foreign currency rose by more than a third over the last three years, reaching 5,300 billion (3,929 billion euro) per day.

It is likely that the main parities such as euro / dollar and yen / dollar, markets that are totally liquid with huge volumes traded, are not concerned. However, incriminated traders are charged with manipulating the minor Scandinavian or Latin American currencies, that are more easily manipulated. They would have benefited from the information provided by the purchase and sale orders of customers to enrich themselves.

“Even if the actual cost to the client is probably not significant, it is a new violation of trust,” said Ian Strafford-Taylor, agent of the electronic exchange FairFX.

Forex has a regulation of flexibility. The limited number of actively traded currencies in the world, large numbers of participants, large volumes and very good organization payments ensure transparency, claimed the police market.

In addition, the supervisors repeated over and over again, the index WM / Reuters is calculated based on the actual transactions and not on estimates, as is the case of Libor interbank rate, also the center of the manipulation scandal.

The forex market is a time bomb. Conducted by Deutsche Bank, Citigroup and Barclays, a handful of bank supermarkets run this bank oligopoly. Regulators are not interested in this market with low margins, the main actors are the banks that buy and sell currencies on behalf of their clients. The rise of non-bank institutions indulging in speculation had hitherto not been worrying.

The confidence of the Bank of England in traders is such that it only takes the pulse of the profession through an appropriate Committee composed of eleven renowned traders, reveals the Sunday Times in its edition dated Sunday November 3rd. Three representatives of the profession serving in this “rump” organ are now suspended.

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