The annual Prime Finance get-together in The Hague is a rather arid affair, with a coterie of academics, lawyers and the odd banker gathering to discuss the finer points of jurisprudence in the international markets.

But at last month’s event a trader spiced things up. “We’ll figure out ways around any rules, so why do you think anything you’re doing is going to make a difference?” the trader asked, according to an attendee.

The trader’s words capture the cowboy mentality of some working in the murkier areas of the trading world, such as foreign exchange and commodities. But for all the bravado, it may be the mindset of a dying breed.

Over recent months, a fast-expanding global investigation into alleged collusion and manipulation among foreign exchange traders has rocked the forex units of more than a dozen large banks, raising fundamental questions about the way they operate.

For many of those banks it is the second such scandal to hit them in short order. Probes into the rigging of benchmark interbank lending rates such as Libor are continuing. To date, the Libor affair has led to the firing of dozens of traders and has cost banks almost $6bn in regulatory penalties. Three chief executives – Bob Diamond at Barclays, Piet Moerland at Rabobank and David Caplin at broker RP Martin – lost their jobs as a direct result of the affair.

The forex scandal, many believe, could be at least as nasty. Martin Wheatley, head of the UK’s Financial Conduct Authority, has called the forex allegations “every bit as bad as . . . Libor”. Banks are braced for a potential barrage of multibillion-dollar fines, years of civil litigation and a host of senior departures. Regulators have given blunt warnings to that effect.

The scale of the $5.3tn a day foreign exchange market dwarfs all others. It is also more tangibly linked to a much broader range of clients, many of whom may be able to prove they were short-changed by the alleged collusion and manipulation of rates by traders. For the big investment banks – under pressure from post-crisis regulations, higher capital requirements and slack trading volumes across the so-called “Ficc” businesses of fixed-income, currencies and commodities – the affair has come at a particularly bad time.

“This probe is a monster,” says Bill Michael, European head of financial services at KPMG. “The forex market is used by everyone so the impact could be far-reaching.”

The shape of the antitrust and fraud probes is vast and muscular. Bank bosses sat up in alarm this month when Ben Lawsky, New York State’s aggressive financial regulator, joined the fray, sending document requests to more than a dozen banks. Mr Lawsky, whose approach is modelled on Eliot Spitzer, former New York attorney-general, shot to prominence 18 months ago when he pursued Standard Chartered for sanctions breaches and secured a $340m settlement.

In all, more than a dozen regulators across Europe, the US and Asia – from the UK’s FCA to the US Department of Justice – are now either running their own inquiries or assisting investigations into allegations that traders used chat rooms and other forms of electronic communication to share client information and collude to manipulate daily currency benchmarks.

The scale of the alleged forex abuses is stretching regulatory capacity. Top DoJ officials have now shifted some investigators from the Libor cases to work on the currency probe, people familiar with the matter have said.

Sparked almost a year ago in the UK, the inquiries have spread around the world, engulfing at least 15 banks. Nine of them – Barclays, Citigroup, Deutsche Bank, HSBC, JPMorgan, Lloyds, Royal Bank of Scotland, Standard Chartered and UBS – have suspended, placed on leave or fired 21 traders. None of the traders has been formally accused of any wrongdoing. All either refused to comment when contacted by the FT, or could not be reached for comment.

Those traders – from Buenos Aires and New York to London and Tokyo – range from junior staff to global business leaders, from specialists in currencies such as the Mexican peso to generalists who trade common “pairs” such as euro-dollar. A handful of the most senior traders are under particular scrutiny for their membership in a specific chatroom known alternately as the Mafia or the Cartel, a powerful group that was widely respected in the trader community.

Banks are conducting their own inquiries. People involved say banks are examining hundreds of millions of messages sent by traders in chat rooms, by text or voice mail. They are also studying trading patterns in every currency in all geographies. One lawyer says the banks, having just gone through the Libor investigations, have a better sense of what they are looking for.

Bank chiefs say the seriousness with which they are taking the forex allegations proves their determination to expose, rather than hide, malpractices. But fear is a factor, too. Some banks, including Barclays, UBS and RBS, have non-prosecution or deferred prosecution agreements with the DoJ over Libor manipulation.

Those contracts force the banks to co-operate with the authorities and put them at serious risk if they are found to have committed crimes in the US in recent years. Mythili Raman, acting chief of the DoJ’s criminal division, told the FT recently: “As part of our Libor resolutions, there have been pledges by banks to co-operate, and indeed requirements by banks to co-operate, not just in connection with Libor but all benchmark manipulations. That has been an important source of information.”

Barclays admitted in its fourth-quarter financial report last week that “a breach of any of the NPA provisions could lead to prosecutions . . . and could have significant consequences for the group’s current and future business operations”.


The Libor scandal has taught banks that it may pay to be ruthless in their own investigations. Last December UBS escaped a potential €2.5bn fine from the European Commission in return for information on a cartel that allegedly manipulated Yen Libor. Such treatment has encouraged some banks to hand over evidence to the commission in an attempt to gain leniency or immunity for the antitrust element of their foreign exchange investigation.

The broader scale of the currencies market – and the direct impact for swaths of corporate clients, asset managers and pension funds – has sharpened the banks’ fears and keenness to co-operate. One person familiar with the commission’s preliminary probe says banks are queueing up to provide incriminating evidence “of startling quality”.

It is already clear from some banks’ internal investigations that there have been instances of traders sharing information about overall trading books and individual client orders, seemingly in a bid to match up their trades and align trading strategies, four people familiar with the investigations said.

At the centre of the allegations is the pivotal “WM/Reuters 4pm fix” – the dominant mechanism for setting a benchmark price at the end of the London trading day by averaging the prices of orders from a few traders.

Collusion, if it is proved, may have been made possible by three things – the archaic structure of the forex market, which still relies on telephone or “voice” trading, rather than more transparent exchange-based electronic orders; a near-total absence of regulatory oversight; and the dominance of the market by a cosy club of currency traders from a few large banks. Four groups – Deutsche Bank, Citigroup, Barclays and UBS – account for more than half of the market. The result is an opaque market that gives bank traders a clear “information advantage” over their clients. Traders say that having information about clients’ intentions, particularly with big trades, helps them negotiate a market marked by large daily price swings.

“The main problem has been an absence of guidance on clear behavioural standards,” a senior compliance banker says. In his opinion, “people weren’t as careful as they should have been in protecting client confidentiality. This would not have been acceptable in other markets, but given that this is not an exchange-traded market no one looked at it closely.”

In spite of the market’s obvious shortcomings and the alleged manipulation, lawyers caution that internal probes are at an early stage and have yet to uncover much hard evidence. Bank investigators have found some examples of suspicious conduct, the lawyers say, but the hurdle of determining whether any laws were violated, especially in the US, remains.

Even the four traders who so far have been dismissed have been given vague reasons – “inappropriate use of electronic communications” in the case of Rohan Ramchandani, Citigroup’s former European head of spot trading – or else have been fired for “bad judgment”, as in the case of Robert Wallden, a Deutsche trader in the US.

“All banks feel the pressure to be seen to be doing something,” the senior banker says. “Some of the suspensions might not even be linked to FX behaviours.”

Investigators are also being hampered by limited understanding of what one lawyer called the unusual “dialect” used by forex traders. “Most of these messages are crushingly boring and pure garbage. [But] they are difficult to decipher,” a senior banker involved in an investigation says.

The hurdle for regulators in Brussels is far lower, however. Under EU law even an attempt to collude would be sufficient for a cartel case, and mere information exchange alone has brought fines in other investigations.


It will be some time before anything definitive emerges from the forex probes. But with the floodlights turned on, there are signs that poor past practices have been tightened up. Many forecast that the regulatory onslaught will speed an already advanced change from voice spot traders towards “system engineers” who oversee electronic trading platforms. “You would expect a further push towards electronic trading. It may essentially move from a risk-taking approach to a more agency-type model,” says Tony Murphy, managing director at Promontory Financial Group, a regulatory consultancy.

Not all of the changes in market practices may be positive. “The market participants are all hamstrung,” says the head of one European investment bank. “People are intentionally making less money with their trades; they are less aggressive in pricing and take lower risks.”

That diminished appetite for risk, combined with regulatory curbs on proprietary trading – whereby traders seek to make money for the bank by taking bets on the direction of rates themselves – will be seen by the authorities as early evidence of a successful crackdown on the industry. But there is a sting in the tail. The shrunken activity in foreign exchange trading – lower levels of “liquidity” in the jargon – means that when big client orders come through they are more likely to spook the market.

“When the market is less liquid,” says one big London hedge fund manager, “there will be bigger price swings.” Spikes of nervousness in emerging markets currency prices in recent weeks were compounded by just this kind of liquidity shortage, he says. “A cleaner market is obviously a good thing. But one consequence is probably a more volatile market.”

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Painting the screen to fix the rate

What are regulators looking for in the forex inquiries? What is the nature of the alleged misbehaviour? Here is a list of alleged “techniques” that some traders may have used:

Sharing information about individual client orders. This enables traders to match up their trades ahead of the fix or to gauge upcoming market movements.

Front-running: using knowledge about impending client orders to build up positions ahead of the fix. For example, a client wants to buy $100m at the price of the fix. The trader then “pre-hedges” by buying dollars in the hour before the fixing, thereby driving up the exchange rate, to the possible detriment of the client who potentially faces a higher price at the fix.

Banging the close: placing a high number of small orders before and around the fix to move the price. Given that the WM/Reuters fix is based on a median of transactions in a short timeframe, many such trades can influence the price.

Painting the screen: engaging in fake transactions with other traders during the fixing period to manipulate the exchange rate.

Hunting for the stops: buying or selling currencies to move exchange rates to a level where stop-losses – orders to automatically sell once a certain price has been reached – are triggered.

Personal account trading: using private money to trade ahead of market-moving client orders.

Reporting team: Daniel Schäfer, Patrick Jenkins, Mike Mackenzie, Kara Scannell, Alex Barker, Camilla Hall, Caroline Binham and Delphine Strauss

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