Soft touch FX regulation falls under harsh glare

Fri Mar 7, 2014 11:26am EST
 
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By Jamie McGeever and Carmel Crimmins

LONDON (Reuters) - In July 2006, during lunch at an upmarket restaurant overlooking the sprawling Smithfield meat market in the City of London, Bank of England officials and senior bank dealers discussed evidence of potential manipulation of the foreign exchange market. People at the lunch said the attempts to move the market meant the process of establishing official prices - known as "fixing" - was becoming "increasingly fraught".

It was two years before the issue was discussed again, according to minutes from the meetings, released after a Reuters freedom of information request, and seven years before the Financial Conduct Authority (FCA), Britain's financial regulator, kicked off a global investigation and banks started to suspend or layoff traders.

The FCA probe focuses on whether traders used advance knowledge of customer orders to try and manipulate benchmark foreign exchange rates for their own gain, and is a blow to the "hands off" approach to regulating the world's largest financial market.

The fact that Bank of England officials knew about possible manipulation and seemingly did not act, raises questions for one of the world's most powerful central banks. A central bank employee has been suspended and an internal probe launched into allegations its staff condoned or were aware of market rigging.

The Bank said that an internal review had so far found no evidence that its staff colluded in any manipulation or shared confidential client information.

British lawmakers will next week question Bank of England boss Mark Carney, and other officials about their oversight of currency trading in London, the global hub for foreign exchange (FX).

Regulators have compared the alleged manipulation to the rigging of benchmark interest rates, or Libor, two years ago. Back then, Barclays (BARC.L: Quote) released an email written by its then chief executive, Bob Diamond, that appeared to suggest Paul Tucker, the former deputy governor of the Bank of England, had known that Barclays was submitting artificially low rates to the Libor-setting process during the financial crisis.

Tucker later told a parliamentary committee that he did not know or approve of the "low-balling" of Libor submissions.   Continued...

 
A plaque depicting Britannia is seen on the outside of the Bank of England in the City of London February 4, 2010. REUTERS/Toby Melville