The Traders World – Manipulating Benchmark Rates Of Foreign Currencies


Recently there has been news that six banks have been fined for manipulating benchmark rates of foreign currencies. The guilty banks were meeting online and coordinating their purchases and sales in order to alter the exchange rate. In this post, we will take a look at how they manipulated the world’s most traded market. But first, let’s give you a bit of information about the FOREX market and how it actually works, as this is pivotal when trying to understand how the banks managed to alter foreign currency rates.

The FOREX market is also commonly referred to as the foreign exchange market or the FX market. Essentially, this market involves the buying and selling of currencies. This is something that affects all of us. Whether you are buying an item on the Internet or you are going on a vacation, there becomes a point where you need to deal with foreign currency. Nonetheless, the market tends to be dominated by central banks, large financial institutions, corporations and the extremely wealthy. However, this does not mean that access is limited. Thanks to the Internet the average investor can also deal in this market. Yet, it is the large banks and finance companies that have most influence, as you will soon discover.

So, how exactly does the FOREX market work? Well, one of the attributes that makes this market truly unique is the fact that trading is conducted electronically over-the-counter (OTC). What this means is that there is no central marketplace for foreign exchange. So, traders all over the world complete their transactions via the use of computer networks. Unlike other markets there is no centralised exchange. Currencies are traded on a global basis in the major financial centres of Sydney, New York, London, Paris, Singapore, Hong Kong, Frankfurt, Zurich and Tokyo. The market is open five and a half days of the week and 24 hours of the day. When you take time zones into consideration, you see how the market can essentially be very active irrespective of what time of day it is.

The Traders World – Manipulating Benchmark Rates Of Foreign Currencies

Now you know a little bit about the foreign exchange market and how it works. This is important, as you will now be able to get a better understanding of how the foreign currency rates were manipulated by traders and employees at several of the main worldwide banks. The banks at the centre of this scandal are the Bank of America, Citibank, US Banks JP Morgan Chase, Swiss Bank UBS, Royal Bank of Scotland and HSBC. Collectively, these banks have been fined £2.6 billion for their participation in the manipulation of the market. It is important to note that there is no regulator of the foreign exchange market. Consequently, these fines have actually been imposed by various regulators – one UK regulator and two US regulators. The UK regulator is the Financial Conduct Authority (FCA), with the US regulators being the Office of the Comptroller of Currency (OCC) and the Commodity Futures Trading Commission (CFTC). It’s worth pointing out that the Swiss bank UBS has also been penalised separately by FINMA, a Swiss regulator. Moreover, there is currently a separate probe into Barclays bank, which could see further fines implemented.

How exactly did these banks manipulate the exchange rates to their benefit? Well, the whole ordeal actually took place via online chat rooms. Participating bank colleagues and traders would meet in private chat rooms on the Internet to discuss when they were planning on making a big sale or purchase. All involved would then coordinate their efforts to push down the price of currency. For instance, one trader would say they were going to sell a huge sum of UK pounds in exchange for dollars. They would then coordinate their sales in order to push down the rate of the currency. The bank therefore would have agreed to sell the currency at a particular rate to their clients, yet by manipulating the market they would actually buy the currency at a lower rate, and as a result the bank would profit. This represents gross misconduct in many different forms. Not only was confidential client information released, but also public trust has been diluted substantially by the actions of these six banks. Moreover, it is vital to recognise that setting the benchmark rate is not only a chance to earn a profit, but a lot of companies and individuals all around the globe rely on the exchange rates to settle financial contracts as well.

The investigation took place over a period of 13 months. Over the past months, examples of private chat room conversations have been brought into public knowledge. You can see the traders and colleagues congratulating themselves, with remarks such as ‘well done gents’ and ‘nice one mate’. Other conversations show the traders at action, with comments including the likes of ‘fix it at 07’ and ‘I am getting about 80 quid now… fixing’. There were also discussion as to whether the traders should invite another member into their chat room – ‘is he going to protect us like we protect each other against our own branches?’ was one remark. Since the fines have been implemented, all banks have issued statements and taken various steps to make it right. HSBC have said they will take whatever action is appropriate, as they do not tolerate improper conduct. The Royal Bank of Scotland has placed six people into a disciplinary process, with three of them being suspended. Citigroup state they have already made changes to their monitoring processes, controls and systems, with JP Morgan echoing a similar statement. UBS have also stated that the employees involved have had the appropriate disciplinary action taken against them.

All in all, it’s remarkable to think that a few individuals could have such a massive impact on the world’s most traded market. However, what’s even better to know is that they did not get away with it. Whilst the FOREX market may not have an overall regulator, there are a lot of national regulators and alike that monitor different kinds of activity to look for anything suspicious. Hopefully, this will stop further manipulation from occurring in future.