An instant-message group involving senior traders at banks including Barclays Plc (BARC), Citigroup Inc. (C) and Royal Bank of Scotland Group Plc is being scrutinized by regulators investigating potential manipulation of the foreign-exchange market, four people with knowledge of the probe said.
Over a period of at least three years, the dealers exchanged messages through Bloomberg terminals outlining details of their positions and client orders, and made trades before key benchmarks were set, said two of the people, who asked not to be identified because the inquiries are continuing.
The roster of firms changed over time and included other banks such as Zurich-based UBS AG (UBSN) as the men switched employers, one of the people said. Two traders who weren’t involved in the conversations and who asked not to be identified because they do business with the people involved said that they and others in the market referred to the message group as “The Cartel.”
Regulators are weighing whether those messages amounted to attempts to manipulate the market, two people said. The four banks account for more than 40 percent of trading in the $5.3 trillion-a-day foreign-exchange market, according to a survey by Euromoney Institutional Investor Plc. The U.K.’s Financial Conduct Authority this week opened a formal probe into currency trading, joining a global investigation that also involves regulators in the U.S., European Union and Switzerland.
“If the information shared is sufficiently precise to indicate collusion, then the regulators will have a case for prosecution,” said David Corker, a lawyer at Corker Binning in London.
Bloomberg News reported in June that traders at some banks said they shared information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates. In August, Bloomberg News reported that recurring spikes in trading around the periods in which the rates are calculated suggested that dealers may have been trying to influence the benchmarks.
RBS, which is based in Edinburgh, handed over transcripts of the group’s conversations to the British regulator after concluding that a former senior dealer in London, Richard Usher, disclosed too much information to competitors, one of the people said. Usher didn’t respond to an e-mail request for comment.
Officials at London-based Barclays, RBS, New York-based Citigroup, UBS and the FCA declined to comment on the discussions among dealers. RBS said in an Oct. 16 statement it was “cooperating fully” with the FCA inquiry.
One trader who participated in the group said the messages sought only to match buyers and sellers for large orders and there was no wrongdoing, according to a person briefed on the exchanges between the traders.
Firms across the industry have been reviewing records of instant messages, e-mails, phone calls and trading data, according to people with knowledge of the probe. Banks, their lawyers and the regulators are sifting through years of conversations peppered with industry jargon and shorthand terms, a process that may take months, one of the people said.
The WM/Reuters rates determine what many pension funds and money managers pay for their foreign exchange and are used by index providers such as FTSE Group and MSCI Inc. (MSCI) to calculate daily valuations of indexes that span multiple currencies. Even small movements could affect the value of what Morningstar Inc. estimates is $3.6 trillion in funds including pension and savings accounts that track global indexes.
The rates are published hourly for 160 currencies and half-hourly for the 21 most-traded. They are the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour. Rates for less-widely traded currencies are based on quotes during a two-minute window.
The data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters in providing news and information as well as currency-trading systems.
Index funds typically buy and sell currencies at the 4 p.m. WM/Reuters rates, known as the London close. Money managers place their orders with banks in the hour or so before the close, giving dealers a picture of their complete order book in advance of the so-called fix. Banks agree with clients to trade at that price, regardless of later moves, leaving dealers at risk of losses if the market moves against them.
Bloomberg terminals enable customers to create their own message groups to communicate with each other.
The traders used the message group to discuss aggregate client orders for particular currencies in the run-up to the fix, said the person briefed on the exchanges between traders. Those discussions allowed dealers to agree to buy or sell currencies at the WM/Reuters rate before they are published, minimizing the risk to the dealer of losing money if the market moved against them, the person said.
Switzerland’s Financial Market Supervisory Authority and the country’s competition commission said this month they were also opening probes into foreign-exchange rates, while the U.S. Justice Department has opened a criminal investigation, a person with knowledge of the matter said last week. EU antitrust regulators said on Oct. 7 they were reviewing the market.
The foreign-exchange inquiry comes as regulators around the world examine the alleged abuse of financial benchmarks by companies that play a central role in setting them. RBS and Barclays were among four firms already fined about $2.6 billion in the last two years for rigging the London interbank offered rate, the benchmark for more than $300 trillion of securities worldwide.
European regulators are reviewing allegations of collusion in crude oil and biofuels markets, while the U.S. Commodity Futures Trading Commission and Britain’s FCA are also probing the potential manipulation of ISDAfix, a benchmark for interest-rate swaps.