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Back in 2012 LIBOR (the London Interbank Offered Rate) was hitting the headlines and million pound fines were hitting the CEOs desks. Now a new scandal could be about to rock the banks in the form of foreign exchange manipulation. Forex is a $5.3 trillion (£3.3tn) a day market in which global currencies are traded, with London being the largest market accounting for around forty per cent of all trading, ahead of New York, Singapore, Tokyo, and Hong Kong. The foreign exchange market is the world's largest market - and also its least regulated - which has led officials from across the globe to take more of an interest in it. The UK markets watchdog, the Financial Conduct Authority (FCA), started its investigation in June when it asked for information form a number of banks trading in London. Since then regulators from Switzerland and America have also launched investigations.
Forex rates are set by the WM/Reuters benchmark which looks at 159 currencies. Every hour the WM/Reuters rate looks at the median bids and offers for a currency traded within a small window to get the fixing rate, representing the true value of the currency at the time to give a fair price that is accepted by the industry. At 4pm there is the largest fix of the day which is where most of the big institutional investors get their rate from. The allegation that the FCA is investigating is that traders would move through large orders during these windows in order to manipulate the price of the currency to benefit themselves. It has been estimated that ninety per cent of currency contracts use the WM/Reuters fix as the benchmark, meaning that a manipulation in price could affect large amounts of money.
Executives at Citigroup, JP Morgan, and Standard Chartered have been placed on leave, whilst RBS suspended two traders and Barclays has suspended six. Deutsche Bank and UBS have also been contacted by regulators. Between them they represent over fifty per cent of the currency trading by volume, and collusion between the banks would have a knock on effect. Any change in price would affect the value of the investments that firms have made, particularly large investors like pension funds.
Banks are still recovering from the LIBOR scandal. In October Radobank was fined $1bn for its part, whilst UBS has paid out $1.5bn and Barclays paid over £290m. These are just some of the fines that have been handed out as a result of misbehaviour by banks. Another scandal so soon could further shake confidence in the ability of financial markets to self-regulate. The Forex market, due to its size and liquidity, ought to be an example of near-perfect competition and extremely hard to manipulate. However, the possibility of a number of large banks fixing the rate could lead regulators to take a harder stance on financial markets in the future.
The investigation is still in its infancy and a long investigation lies ahead for the FCA and its peers. If the banks are once again found guilty of wrong doing questions may be raised about the ability of the banks to control markets, and the million pound fines will be back.