Royal Bank of Scotland Group Plc is reviewing how it trades in the minutes before key foreign exchange benchmarks are set amid a regulatory probe into possible manipulation of the $5.3 trillion-a-day market.
RBS’s foreign exchange sales team contacted some clients, pledging the Edinburgh-based lender won’t share details of their orders or use them to make proprietary bets, according to an Oct. 23 e-mail, which was read to Bloomberg News.
“We are currently considering processes around the benchmark service,” Sarah Small, a spokeswoman at RBS, said in a statement. “The e-mail does not reflect final policy and we are clarifying this with our clients.”
The lender handed over records of an instant message group to U.K. regulators after concluding a former senior currency trader’s communications with counterparts at firms including Barclays Plc and Citigroup Inc. were inappropriate, two people with knowledge of the matter said this month. Barclays said today it has been contacted by authorities probing the currency market and is reviewing its trading practices.
In June, Bloomberg News reported that dealers pooled information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates by pushing through trades around the 60-second windows when the benchmarks are set.
“No traders or proprietary system will take any position on the back of your order,” the RBS sales team said in the e-mail. “Our usual high standards of client confidentiality will apply.”
The WM/Reuters rates determine what many pension funds pay for their foreign exchange and are used by index providers such as FTSE Group to calculate indexes spanning multiple currencies. Index tracker funds, which buy and sell currencies at the 4 p.m. WM/Reuters rates, typically place their orders in the hour or so before the close, giving dealers a picture of their complete order book in advance of the so-called fix.
Because banks agree with clients to trade at the WM/Reuters rates, regardless of later moves, dealers are at risk of losses if the market moves against them.
RBS told clients it would start “pre-hedging” orders up to 15 minutes before the benchmark is set to protect itself against market movements.
“You should also be aware that this could potentially result in the market moving against you,” the bank said in the e-mail. “However, we will take steps to minimize the market impact within the above context notably by executing the order over a longer period of time.”
WM/Reuters 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., 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.