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FX Market Hit with “Manipulation” Claims

Traders at some of the largest global banks have manipulated the benchmark foreign exchange rates used to set the value of investments, say five senior dealers, according a Bloomberg News report.

The traders have allegedly been front-running client orders and subsequently rigging the WM/Reuters rates by submitting trades before, and after, the 60-second trading windows – within which the benchmarks are set –  according to five dealers with knowledge of the practice, says Bloomberg. It is also alleged that dealers colluded with counterparts at other institutions to, “boost chances of moving the rates.”

Bloomberg’s sources state that the practice has been taking place in the spot FX market on a daily basis for at least a decade, and has affected the value of funds and derivatives. Britain’s markets supervisor, The Financial Conduct Authority, is reportedly considering an investigation into the potential manipulation.

The WM/Reuters rates were introduced in 1994 and are collated and distributed by World Markets, a subsidiary of State Street. The rates provide standardised benchmarks to allow fund managers to value and assess holdings and performance.

Since the Libor-rate fixing scandal began to sweep the market last summer, industry bodies and regulators have undertaken extensive investigations into those allegedly involved. Barclays was ordered to pay a £290 million fine at the end of June, split between the FSA (£59.5 million) and US regulators, the Department of Justice (DOJ) Fraud Section and the US Commodity Futures Trading Commission (£231 million) (Squawkbox 1 July 2012).

The Royal Bank of Scotland has also been fined $325 million over Libor; the DOJ levied a $150 million fine, while the FSA hit the firm with a £87.5 million fine. In January this year the Financial Times reported that a subsidiary of the world’s largest interdealer broker, Icap, was under investigation by the UK’s Financial Services Authority, due to Libor fixing, with seven people from the 50-strong Libor-focused team at the FSA focusing on Icap (Squawkbox 28 January 2013).  

Sources in the trading community are reluctant to discuss the report, one suggesting there is “nothing but downside” for the industry in the alleged events. There has been a growing concern about the general level of volatility surrounding the 4PM fix, but this was not seen in any quarter as being an issue of collusion. In a statement ACI – The Financial Markets Association reminds its members and all OTC market participants of the firm guidelines that these traders have allegedly breached, found in the ACI Model Code, which was updated and re-launched earlier this year (Squawkbox 18 February 2013). The Model Code was compiled in 2000 to promote best practice and conduct in the largely unregulated global OTC money markets, after building on the original version, published in 1975.

A chapter in the updated industry code specifically and extensively covers dealers’ responsibilities with regard to rate manipulation, “Written procedures should clearly stipulate the institution's control policy in relation to 'front running' or 'parallel running'; where traders knowingly execute trades in front of a customer order. These trades would not have been executed without that prior information obtained; hence this is a form of insider trading and should be banned accordingly.

"Dealers and sales staff should not, with intent or through negligence, profit or seek to profit from confidential information, nor assist anyone with such information to make a profit for their firm or clients. Hence, employees have a duty to familiarise themselves with the requirements of the relevant legislation and regulations governing insider dealing and market abuse in their jurisdiction.

“Dealers should refrain from trading against confidential information, and they should never reveal such information outside their firms, even after they have changed employment. In those jurisdictions where insider trading and market abuse are not covered by legislation or regulations, management should take reasonable steps to protect the confidentiality and integrity of proprietary and materially price-sensitive information, and provide clear guidelines to staff on how to handle such information.

“In the event of a breach of controls, management should act promptly to investigate the breach and should take appropriate steps to rectify the weaknesses that allowed the breach to occur. Appropriate sanctions should be available to, and used by, management against staff who do not comply with policy".

The chair of the ACI – The Financial Markets Association’s Committee for Professionalism (CFP), David Woolcock, at the launch of the new Model Code in February told the audience, "A universal code of conduct, with comprehensive guidelines and best practices right through from back office to front office, will help provide a moral compass and guidance to which all OTC professionals can adhere."

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