New York - The US Federal Reserve is investigating whether traders at the world’s biggest banks rigged benchmark currency rates, raising the risk that firms will be penalised for lax controls as regulators look for wrongdoing.
The Fed, which supervises US bank holding companies, is among authorities from London to Washington probing whether traders shared information that may have let them manipulate prices in the daily $5.3 trillion (R56 trillion) foreign exchange market to maximise their profits, said a person with knowledge of the matter, asking not to be named as it is confidential.
“The Fed has discretion whether and how much to fine the banks if deficient controls or lack of supervision resulted in traders at these banks manipulating currency rates,” said Jacob Frenkel, a former federal prosecutor and now a lawyer at Shulman Rogers Gandal Pordy & Ecker in Maryland.
The Fed punished firms for internal-control lapses last year as it worked with state and federal authorities on cases involving Iranian sanctions and botched derivatives bets. The foreign exchange inquiry looks at benchmark WM/Reuters rates used by companies and investors around the world.
Those rates are determined by trades executed in a minute- long period called “the fix” at 4pm in London each day. By concentrating orders in the moments before and during the 60- second window, traders can push the rate up or down, a process known in the industry as “banging the close”.
Deutsche Bank, Citigroup, Barclays and UBS control more than half of all foreign-exchange trading, according to a May survey by Euromoney Institutional Investor.
Barbara Hagenbaugh, a Fed spokeswoman in Washington, declined to comment.
Bloomberg reported in June last year that traders at banks had been manipulating spot foreign-exchange rates for at least a decade, affecting the value of funds and derivatives. Britain’s Financial Conduct Authority, the Swiss Competition Commission and the US Justice Department are investigating.
At least a dozen banks have been contacted by authorities, and about 12 currency traders suspended or put on leave. Companies including Lloyds Banking Group and Royal Bank of Scotland have announced their own internal reviews of the matter.
Fed supervision focuses on potential risks to banks and assesses a firm’s ability to “identify, measure, monitor and control these risks”, according to the central bank’s website.
The regulator examines banks for weaknesses that could affect their safety and soundness or violate laws. If lapses are found, it can send a report to the company, issue an order, impose fines, remove officers or directors and bar them from the industry. Its oversight can include international operations of US banks and the US operations of foreign banks.
“Because foreign-exchange regulation is largely nonexistent, the task falls to the Fed to use its regulatory powers to ensure that the banks address all controls associated with currency trading,” Frenkel said. – Keri Geiger and Caroline Salas Gage from Bloomberg