Foreign Exchange: The New Rate Rigging Scandal


The largest global financial market is at the centre of a mounting international investigation into alleged currency benchmark rigging.

Investigations opened by over a dozen regulators in United States, Asia and the United Kingdom, have implicated trading desks of some of the largest banks who reportedly position their own trades to profit from client orders and distort foreign exchange rates. Multinational companies rely on the US$4.7 trillion-a-day foreign exchange (FX) market for daily spot transactions and hedging against currency volatility using futures and swaps.

Multinational companies and traders base currency orders on the WM/Reuters rates, a standardised benchmark measured on the median average of trades executed within a 60-second pocket on an hourly or half-hourly basis. The rate set at 4 pm, London close, is most widely used for business trade activity.

The trouble started last July, when Bloomberg reported that for the past decade the WM/Reuters benchmark had been manipulated by a network of traders with large enough market-making operations and client trade activity to artificially move currency rates and turn a profit. The report, based on interviews with traders, alleged that trades would be executed en masse during the 60-second threshold when currency rates were to be recalibrated.

Although the Bloomberg report focuses on rate manipulations of spot FX transactions, the distorting effect extends into currency futures and swaps markets. Both spot transactions and currency hedging instruments play critical functions in risk and cash management operations for multinational businesses.

Since then, global currency markets have been subjected to greater scrutiny from regulators who are targeting banks for trade data information. In the wake of the growing scandal, many banks with large currency market operations, including the Royal Bank of Scotland, Deutsche Bank, Barclays, UBS and JP Morgan, have moved to conduct internal probes of their own activity.

In early March, minutes released from a Bank of England (BoE) meeting revealed that the central bank was aware as early as 2006 about allegations of currency manipulation.

The currency rigging scandal closely mirrors the previous interest rate scandal, where a rate used by banks for short-term loans, the London interbank offered rate (Libor) was also found to have been manipulated. Even so, as this investigation remains to be in its early stage, the recent currency rate rigging case has swelled into a larger inquiry that will likely result in costly legal damages and investigative expenses.


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