UK opens formal probe as FX investigation goes global

HONG KONG/LONDON Wed Oct 16, 2013 5:35pm BST

A man walks past a display showing the exchange rates of foreign currencies in Zurich October 4, 2013. REUTERS/Arnd Wiegmann

A man walks past a display showing the exchange rates of foreign currencies in Zurich October 4, 2013.

Credit: Reuters/Arnd Wiegmann

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HONG KONG/LONDON (Reuters) - The global probe into suspected price manipulation in the currency market intensified on Wednesday, with Hong Kong becoming the first authority in Asia to look into the allegations and Britain opening a formal investigation.

In echoes of the global probe into interest rate rigging, authorities are examining electronic messages between currency traders to see whether they colluded with counterparts.

Authorities in the United States, Europe and Asia are now looking into suspected price manipulation in the $5.3 trillion-a-day market.

Several media reports have suggested that traders manipulated the fixings, or snapshots of where currencies are trading at a particular time in the market, which are used to price trillions of dollars worth of investments.

Regulators and investors are looking carefully at the integrity of financial benchmarks after a global investigation into interest rate rigging led to fines for four financial firms including Switzerland's largest bank UBS.

Switzerland and the United States are already making inquiries about whether the currency traders used advance knowledge of client orders and each other's trading positions to rig the foreign exchange fixings in their favour.

The Hong Kong Monetary Authority said on Wednesday that it was talking to foreign regulators and banks about the currency market allegations.

"The Hong Kong Monetary Authority is aware of the allegations. We have been in communications with the relevant overseas regulators and (are) following up with individual banks," the de facto central bank said in a statement.

For its part, Britain's Financial Conduct Authority said it had progressed from asking banks for information relating to FX trading to opening a formal probe and is working with agencies overseas.

"Our investigations are at an early stage and it will be some time before we conclude whether there has been any misconduct which will lead to enforcement action," an FCA spokesman said.

Switzerland's financial markets regulator FINMA said earlier this month that it was investigating several Swiss banks. FINMA did not name the banks under scrutiny but said multiple banks around the world were potentially implicated.

The chairman of Credit Suisse, Switzerland's second-largest bank, told a local newspaper this month that it had not found any evidence of malpractice in the FX market following inquiries from regulators.

Investment banks, including Royal Bank of Scotland and Deutsche Bank, have handed over instant messages and emails to Britain's Financial Conduct Authority (FCA) over the summer as part of its probe, banking sources said.

Last week, a source familiar with the matter said the United States was also involved in the probe.

Authorities in the United States and Britain, RBS and Deutsche Bank have all declined to comment about the probes.

CHATROOMS

Stung by revelations of lax oversight and controls in the Libor interest rate rigging scandal, banks are pro-actively handing over information from their FX desks to watchdogs.

"It's a two-way flow of information," said a source at a U.S. bank.

A source familiar with the British inquiry said the tone of messages between foreign exchange traders was similar to exchanges between Libor derivatives traders, whose arrogance as they manipulated benchmark interest rates stunned regulators, politicians and the public in 2012.

Media reports this week suggest the investigations centre on a group of senior dealers at big banks who communicated via electronic chatrooms. The group was known by names such as "The Cartel" and "The Bandits' Club".

The most popular benchmark is the WM/Reuters "fix", which is set at 4 pm London time, using actual trades and order rates from Reuters and rivals such as EBS during a 1 minute "fix" period. WM, a unit of State Street, calculates the benchmark using the median of the trades and the orders.

Bloomberg News reported in June that traders at some banks may have pooled information about their positions through instant messages and sought to manipulate the WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set.

The WM/Reuters FX rates are used by investors and corporations looking for a rate to price their portfolios and currency holdings. Most of the main equity and bond index compilers also use the rates in their calculations.

(Additional reporting by Kirstin Ridley and Steve Slater in London; editing by Ron Askew)

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