LONDON The first set of rules for the unregulated multi-trillion dollar foreign currency market will be considered after the completion of probes into possible manipulation, a British regulator said on Tuesday.
The Financial Conduct Authority (FCA), along with watchdogs from the United States and Asia, is investigating if traders tried to rig foreign exchange benchmarks, such as the so-called London fixing at 4 p.m. each day, which is the nearest thing to a closing price in the 24-hour, self-regulated market.
Barclays (BARC.L), UBS UBSN.VX and Deutsche Bank (DBKGn.DE) are cooperating with regulators who are investigating the matter, while Royal Bank of Scotland (RBS.L) has said it is reviewing its forex processes.
Inquiries into the forex market are the latest probe into possible market manipulation by leading banks, coming after hefty fines were imposed on several lenders for rigging the London interbank offered rate, or Libor, a widely used interest rate benchmark.
FCA Chief Executive Martin Wheatley said the watchdog was gathering "facts and evidence" about what may have happened in forex markets.
"If that evidence suggests a more fundamental problem, then you've always got a set of responses," Wheatley told reporters on the sidelines of an FCA conference.
"One response says you have to enforce against poor behaviour, and the other response is to look at the conditions that allowed that behaviour to exist. That is what we did with Libor and came up with a set of structural changes," Wheatley said.
"Frankly it's an unregulated market and that would be a big policy change for global regulators to decide that forex needed to be a regulated market. The truth is we are at a very early stage and a long way off before we can make any conclusions."
Currently Libor is the only widely used financial benchmark to be directly regulated by the FCA in Britain, following a law in April which also made rigging of Libor a criminal offence.
The watchdog has, however, begun looking beyond this regulatory "perimeter" to other types of benchmarks.
With 40 percent of global forex trading taking place in London, the FCA has already begun scrutinising how benchmarks based on that market are being compiled, an FCA official said. And its inquiries go beyond that area.
Those who administer oil, gold and other major, non- interest rate-related benchmarks, as well as those in forex, have been asked to assess by July next year how they comply with new global regulatory principles governing all types of indexes following the Libor scandal.
The FCA has also asked banks which provide quotes for a range of benchmarks, including forex, to "run a rule" over their submissions process and show how they have applied lessons from the Libor scandal, the FCA official said.
The key foreign exchange rates, WM/Reuters, are compiled using data from Thomson Reuters (TRI.TO) and other providers, and are calculated by WM, a unit of State Street Corp (STT.N). Thomson Reuters is the parent company of Reuters News, which is not involved in the fixing process.
The WM/Reuters rate set at 4 p.m. London time is considered the benchmark by many companies and investors because of the large amount of FX trading which is done in London.
(Editing by David Holmes)