Common currency: a forex scandal that epitomises the blindness in the banking crisis

16 November 2014, 8.19pm AEDT


The biggest open secret in the financial world has been confirmed. Regulators in the UK, the US and Switzerland have announced massive fines for some of the world’s largest banks for a manipulation of global currency markets that in its callous ubiquity says so much about the banking behaviours that sparked the global financial crisis.

Fines levied by the UK regulator add up to £1.1 billion. The US regulator announced fines of $1.4 billion. Banks hit by these fines include UBS, Citi, JP Morgan, HSBC and RBS. Barclays is yet to come to a settlement on the back of the investigations.

The probe uncovered individuals traders within large banks who were working together in trading clubs which had names you would expect from the “ruthless narcissists” on BBC TV show, The Apprentice. These included “the players”, “the 3 musketeers” and “1 team, 1 dream”.

These clubs worked together to influence the WM Reuters 4pm fix – essentially the official number used to fix currency rates. It shapes everything from how much we pay for currency when we go overseas to how much our pension fund pays when it wants to buy into an offshore investment. This is one of the core numbers in global finance.

Monopolies; commission

So, it sounds important, but why should we actually care? Well global currency markets are worth over £5 trillion a day. They are the world’s biggest financial market. More than 40% of the trade takes place in London, and more than half of this trade is dominated by just four players: Citi, Deutsche Bank, UBS and Barclays.

A small percentage of the trade relates to buying actual things (such as a shipment of coffee or oil). Most of it is either purely speculative or part of the process buying other speculative financial instruments. According to one piece in the Financial Times, there are really only a hundred or so people who really matter in this market. About 30 of them have been either placed on gardening leave or have been fired from their position in the last year.

The various documents released reveal a world where people talk in a mix of financial jargon, and the salty slang of an Cockney street trader. The traders say things like “you getting betty on the mumble still” or “have that my son” and refer to “other numptys” in the market. The documents also reveal strategies used to manipulate the markets.

In one, based on records of traders activities at RBS, we find traders using three techniques to get the fix to move the way they wanted it to. They might conduct deals outside of the accepted channels, skew their trades to one buyer in an effort to consolidate influence or simply go hell for leather on trades in one direction as the fix approached. Such methods were given descriptions such as “taking out the filth” or “leaving you with ammo”.

Perhaps most worrying was the institutional failures of process at work. Various reports show that the large banks did not have systems in place to understand what was going on. They did not monitor the chat rooms where traders co-ordinated market fixing. When concerns were spotted, they were not elevated. One official at the Bank of England who was aware of irregular behaviour in the market did not push this information upwards in the organization. When whistleblowers did speak out about practices they were concerned about, their concerns were largely overlooked.

Major failings

The investigations reveal a number of serious failings in the world’s biggest financial market. These include significant shortcomings in the way markets are designed, the way firms function, and the over-arching culture at play.

There are big problems with the design of the global currency market which make it a hot-house for growing bad behaviour. It has almost no rules, meaning activities like sharing insider information, collusion or trading on your personal account at work – illegal or banned elsewhere – are perfectly legal in the currency market. There has been little in the way of oversight or policing. The main body involved in regulating the market based at the Bank of England is made up of a group of senior traders (some of whom have subsequently been suspended for bad behaviour).......



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