Tuesday, October 22, 2019
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Swiss, UK watchdogs step up forex investigations

London/Zurich: The sprawling probe into alleged manipulation of foreign exchange markets stepped up a gear on Monday when two European regulators intensified their efforts to find out whether banks rigged crucial financial benchmarks.

Switzerland’s competition watchdog became the first regulator to publicly confirm it had uncovered signs of illegal activity as it announced an investigation into possible forex manipulation by eight banks. Meanwhile, the UK’s financial regulator said it was examining the controls investment banks have in place to prevent traders from rigging benchmarks.

Switzerland’s Wettbewerbskommission said it had launched a probe into four domestic lenders — UBS, Credit Suisse, Julius Baer and Zurcher Kantonalbank — and four foreign banks — Barclays,JPMorgan, Citigroup and Royal Bank of Scotland

“There are indications that these banks went into anti-competitive agreements to manipulate price rates in foreign exchange trading,” Weko said.

Its focus on whether banks broke antitrust laws raises the prospect of bankers’ biggest fear: a series of multibillion-dollar fines for violating competition rules. The European Commission and the US Department of Justice are also looking at potential infringements of antitrust law.

One person familiar with the commission’s preliminary probe recently told the FT banks have been queueing up to provide incriminating evidence “of startling quality” in an attempt to secure leniency. More than a dozen regulators on four continents are investigating whether traders at more than 15 banks colluded to manipulate the $5.3tn a day currency market.

Weko’s announcement follows a preliminary review launched in September again widens the number of banks under scrutiny. It said it could not rule out the involvement of even more banks and inter-dealer brokers.

The Swiss watchdog’s intervention prompted an unusually strong rebuke from Credit Suisse, which has so far been on the fringes of the global investigation despite launching an internal probe into its forex operations last year.

The bank said it was “astonished” and added: “The press release contains incorrect references to Credit Suisse AG and these allegations are both inappropriate and harmful to our reputation.”

Credit Suisse said it would co-operate with the authorities, as did Julius Baer, Zurcher Kantonalbank and RBS. The other banks declined to comment.

Chris Wheeler, analyst at Mediobanca, said Credit Suisse’s statement “doesn’t really help their case”.

“But it shows how strongly they feel about it. They clearly don’t think they have got an issue,” he added.

Meanwhile, the Financial Conduct Authority, one of the key authorities in the forex probe, said it wanted to review if banks have measures in place to reduce the risk of traders “manipulating prices”. It is also looking at how banks manage conflicts of interest between their obligations to clients and their own positions.

It came as Julius Baer revealed that the two forex traders it had suspended recently were now back at work. The private bank said earlier this year that Finma, the Swiss banking watchdog, had been in touch regarding “a couple” of employees who had joined the private bank from Credit Suisse and UBS.

The global forex probes have prompted 11 banks — including UBS and the four foreign banks under investigation by Weko — to suspend, place on leave or fire a total of at least 31 staff.

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.