Manipulation of the Currency Market: Six Banks Fined

Investigation. Information Background.

A new fine for the financial sector: the British and American Swiss financial regulators were condemned this Wednesday, November 12. Six major banks were fined 4.2 billion dollars for having manipulated systematically and large-scale foreign exchange market.

The Commodity Futures Trading Commission and the Office of the Comptroller of the Currency in the United States, the Financial Conduct Authority in the United Kingdom and the FINMA in Switzerland are coordinated in a major global survey by fining Bank of America Citibank, HSBC, JP Morgan Chase, Royal Bank of Scotland and UBS. It is the latter that is most heavily condemned, with $803 million to pay. Fines, however, were reduced by 30% because the six institutions have agreed to cooperate with the financial authorities, seeking to draw a line as quickly as possible on this scandal.

The fault of the banks echoed the previous big scandal over Libor, the interbank interest rates. Traders have acted in the same way: illegal agreements between a small number of players in the big banks, talking on chat rooms to their computers to agree and support. The messages exchanged leave little doubt about their intentions. “How can I make money easily if you do not give me fucking information in advance?” Laughs one of them, quoted by the survey. “I would prefer to join our forces,” offers another.

In principle, the forex market is very difficult to handle. This is by far the largest market in the world, every day 5000 billion are traded, twenty times more than all the world’s stock markets. Approximately 40% of volumes are made in London.

Two indices have security issues

Faced with this monster constantly moving, many companies or financial institutions need to have a reference point on which to rely. For this, the indices were created, upon which billions of financial products. Two of them stand out: one, entitled WM Reuters is the average price of a currency during the thirty seconds before and after 16 hours, London time. The second is European Central Bank Fixed, reflecting the same at 13 h 15 and is based on the interaction between central banks.

Both indices have shown the fault. Traders, usually unable to handle the currency market, have two windows shot during which they can focus their efforts. Playing up or down big bucks during this very short period, they can influence the price of a currency. This in itself is not illegal, it is normal market practice. However, what is not allowed is to agree among banks to do this. That is what happened between 1 January 2008 and 15 October 2013, the period that regulators have focused on.

The FCA, the UK regulator, cites the example of Citigroup. That day, the US bank has been ordered by a customer to buy 200 million euros, the fixed price of the European Central Bank. He then joined in discussions with colleagues from four other financial institutions to see if they also have orders of euros. They then agreed to combine their orders and all transfer to Citi, which was left with orders of €542 million. With this windfall in hand, the trader goes on the offensive a few seconds before 13 h 15. He places four orders to buy euros, to levels above what vendors offer him.

Scandal is not done yet

The result is spectacular during the thirty-three seconds surrounding the determination of the index, Citi has made three quarters of currency trading. Clearly, the trader has flooded the market and managed to dominate, by raising the price slightly. Just after that manipulation the traders of other firms congratulated each other in the chat room.

The fine imposed by regulators on Wednesday is however not the end of the scandal. Other banks are still under the investigation. In addition, many traders are being sued individually. Finally, regulators announce the opening of a program of “turnaround” on the currency market for the entire financial industry. “We want to ensure that firms are tackling the root causes and improve market practices, says the CFA. We ask their directions to take responsibility to make these changes and to prove that the work was done.” The Forex scandal will be a subject of everyone’s discussion in the industry for months to come.

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