March 28, 2014 / 6:10 PM / 5 years ago

Nerves grow over impact of fixing row, FX regulation

BERLIN (Reuters) - A drop-off in major currency market volatility may be due as much to banking regulations and a row over alleged manipulation as to ultra-low interest rates in the developed world, industry figures said on Friday.

A money changer inspects U.S. dollar bills at a currency exchange in Manila January 15, 2014. REUTERS/Romeo Ranoco

Meeting at one of the year’s big foreign exchange gatherings in Berlin, officials from banks, trading platforms and brokerages said the industry is becoming increasingly hamstrung as banks struggle with new rules and a series of investigations into alleged wrongdoing around daily benchmark “fixings”.

Behind the numbers showing currency markets are worth more than $5 trillion daily, volatility, the lifeblood on which investors depend to rack up profits, is close to all-time lows. Three months into 2014, players are increasingly concerned about when it will pick up for the major currencies.

The running assumption of most has been that the fall-off in the vigor of price moves and speculation is due mainly to the almost identical and very low returns offered by official rates on dollars, euros, sterling, francs or yen.

But noticeably there was little lasting impact on volatility from significant statements by the heads of the Bundesbank and the U.S. Federal Reserve over the past two weeks. If the malaise turns out to be due more to the fallout of banks’ efforts to shore up capital and control dealing rooms more tightly, it may leave the market in the doldrums for far longer.

“As far as I’m concerned it’s obvious that the banks are simply not able to take as much risk as they were and that is having an impact on volatility,” said a senior official with one leading trading platform, asking not to be named.

“In the past, when something happened that looked worth trading on, people would just jump on it and the herd would follow. Now people see something happening and they simply don’t have the ability to go out there and do something.”


If anything was supposed to awaken the major markets from a months-long slumber it was a stronger message on U.S. interest rates like that given by Fed chief Janet Yellen last week.

Yet 10 days on, most of the main currency pairs are back in the tight ranges that have dominated in some cases since as far back as 2010.

Volatility, measured in the market by “Vols” options contracts, is the degree to which prices move up or down. The less there is, the more dealing rooms will struggle to meet targets for annual trading returns.

“It has been like this before but it certainly doesn’t bode well,” said a forex dealer with one London bank. “We would expect February and March to be our busier time but there is very little happening.”

Opinion is divided, but many participants speculate there is another factor at play: the official probes into market manipulation that bankers say have forced all of the major banks to look again at how their dealing rooms operate.

“One can certainly ask how much what is going on is related to the fact that some people in the market have been given a reason to pause and consider if everything they were doing was strictly above board,” says the same dealer.

“A lot of people have pulled in their claws and maybe that is at the heart of this.”

Others point to the strong moves on a number of emerging currencies this year as evidence that the market is still ready to jump on a clear investment story.

“If this had really been about the fixing scandal, we wouldn’t have seen those moves,” said an official from the broker arm of another London-based bank. “It is just there is no story to hang your hat on with the majors. The problem is that unless China’s economy blows up, that may not change in a hurry.”

Editing by Ruth Pitchford

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