Forex probes raise fears of a repeat of Libor scandal

Barclays on Wednesday became the latest bank to confirm that it has launched an internal probe into its foreign exchange trading, adding to a growing sense among bankers and investors that an industry-wide investigation is rapidly spiralling into a scandal that might eventually match the scale of the Libor manipulation saga.

What started this June with requests for information by regulators following media reports that traders at banks had sought to manipulate benchmark foreign currency rates has escalated within a few months into a series of wide-ranging probes spanning three continents and some of the world’s largest banks.

At least six authorities globally – the European Commission, Switzerland’s markets regulator Finma and the country’s competition authority Weko, the UK’s Financial Services Authority, the Department of Justice in the US and the Hong Kong Monetary Authority – are looking into allegations that bankers colluded to move the currencies market.

Banks including UBS, Deutsche Bank, Citigroup, Barclays, HSBC, Royal Bank of Scotland, JPMorgan and Credit Suisse have launched internal probes or received requests for information from regulators, according to people familiar with the situation.

“This is an industry-wide issue,” a top executive at a large European bank says. “It is very complex but what is clear is that there are more than just a few big market players involved.”

Banks are scouring years of instant messages and emails to search for instances of wrongdoing. “We are going through what is an exhaustive process of reviewing documents,” says one senior banker.

News about the probe has rattled traders in an area that has been one of the bigger profit drivers of investment banks’ trading units in past years but which has been challenged this year as low volatility in currencies cuts opportunities for speculators.

Lawyers in the UK say they have received “dozens” of requests for legal advice from senior traders and global business heads at banks ranging from Barclays to RBS since the UK’s Financial Conduct Authority started a formal probe two weeks ago. “People feel that this is going to follow the exact same pattern as Libor, with dozens of traders eventually being forced to leave,” says one lawyer.

Some banks have already reacted. UBS this week said that it had “taken and will take appropriate action with respect to certain personnel”. At the same time, Standard Chartered suspended Matt Gardiner, a former senior currencies trader at Barclays and UBS who only joined the UK bank a few weeks earlier.

Richard Usher, head of spot foreign exchange trading at JPMorgan in London, has also been on leave since a few weeks ago, people close to the situation told the Financial Times. Mr Usher was poached three years ago from RBS. The UK bank has this month handed over to the Financial Conduct Authority records of instant message strings between a former RBS currency trader and traders at other banks including Barclays and Citigroup, two people close to the situation say.

Rohan Ramchandani, Citi’s head of European spot trading, also agreed on Wednesday to go on leave, people familiar with the situation said.

The probes hit a business area that with $5.3tn in daily volume is the largest financial market in the world. “I always thought that if there’s a market that’s least manipulated it’s the FX market,” says one investor. Among bankers, the foreign exchange market is often viewed as the less sophisticated relative of the rates market, whose traders are seen to have a reckless culture on the forex trading floor.

In what is a largely unregulated and off-exchange market, traders have devised their own rules of what constitutes fair play. Traders say it is perfectly normal to chat to traders at other banks, sharing views on pieces of economic data due out, or simply gossiping. One senior trader told the Financial Times that it was normal for traders to share details of their positions with each other – so long as they did not name their clients.

So, for example, traders trying to work out whether the euro would rise or fall at the daily 4pm fix – a WM/Reuters benchmark that is crucial for many large client orders – might tell traders at other banks they needed to buy, or sell, euros.

From there it could be a short step for the regulator to deduce collusion. One investor says he was very surprised to hear that traders would even share their positions with each other.

“It doesn’t have the ring of truth to suggest the entire FX market is being perpetually rigged,” another investor says but adds: “Could there be collusion among banks to rig the benchmark rates? Yes.”

The Libor scandal has already triggered fines against four banks and a brokerage totalling $3.7bn.

With the Libor rate-rigging scandal far from over bankers are bracing themselves for more regulatory scrutiny over forex trading.

Additional reporting by Delphine Strauss and James Shotter