Biggest banks to overhaul currency trading

Published Sep 17, 2014

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Julia Verlaine and Gavin Finch London

THE WORLD’S biggest banks are overhauling how they trade currencies to regain the trust of customers and pre-empt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation.

Barclays, Deutsche Bank, Goldman Sachs, Royal Bank of Scotland (RBS) and UBS, which together account for 43 percent of foreign exchange trading by banks, are introducing measures to make it harder for dealers to profit from confidential customer information and take advantage of clients in the largely unregulated $5.3 trillion (R58.4 trillion)-a-day currency market, according to people with knowledge of the changes.

Banks have capped what employees can charge for exchanging currencies, limited dealers’ access to information about customer orders, banned the use of online chat rooms and pushed trades onto electronic platforms, according to the people, who asked not to be identified because they were not authorised to discuss their firms’ practices.

“This is finally bringing the foreign exchange market into the 21st century,” said Tom Kirchmaier, a fellow in the financial markets group at the London School of Economics who specialises in the governance of banks. “What we’re seeing is a modernisation of processes that probably should have been brought in 15 or 20 years ago.”

The banks are acting after authorities on three continents opened probes into allegations that dealers leaked confidential client information to counterparts at other firms and colluded to rig currency benchmarks used by money managers.

US and UK regulators are in talks to settle some of the probes as soon as November.

Prosecutors in the US were preparing to file charges against traders as soon as next month, two people with knowledge of the matter said.

The scandal may cost lenders as much as $15 billion in fines, according to Chirantan Barua, an analyst at Sanford C Bernstein in London.

Regulators are probing allegations that traders shared data about orders with people at other firms using instant-message groups with names such as “The Cartel” and “The Bandits’ Club”, and with clients in a bid to win business.

One focus is whether dealers sought to move the WM/Reuters rates in their favour by pushing through trades before and during the 60-second windows when the benchmarks are set.

Britain’s Financial Conduct Authority (FCA) had ordered banks this year to review their rules about conflicts of interest in the foreign exchange market, a person with knowledge of the talks said. The regulator will also evaluate the controls that firms have over traders around the time benchmarks are set, according to its business plan. FCA spokesman Chris Hamilton declined to comment.

“The banks are very concerned about what the regulators are going to do, and this makes them look good,” Colin McLean, the founder and chief executive of SVM Asset Management in Edinburgh, said. “Maybe they think it protects them somewhat from future regulatory changes.”

This year RBS and Barclays had stopped traders and salespeople from seeing colleagues’ forthcoming deals and their banks’ buy and sell orders in aggregate, four of the people said. Such information was useful for traders looking to protect themselves or profit from future market moves.

RBS now segregates client requests for currency trades at the benchmark rate from the rest of the order book, according to two of the people.

The bank also stopped taking orders at WM/Reuters rates for some emerging market currencies, which were more vulnerable to manipulation because they were less widely traded, the people said.

At Barclays, deals of more than $20 million now showed only basic information, two people said.. If a salesperson or trader tries to view the details of the order on the firm’s internal computer system, a pop-up box appears, warning them that their interest will be logged and an e-mail sent to compliance. – Bloomberg

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