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Currency Dealers Told Bank of England of Fix Trading in 2012

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Currency Traders Told Bank of England of Fix Practices in 2012
The main entrance to the Bank of England in London, on Jan. 8, 2014. Photographer: Chris Ratcliffe/Bloomberg

Bank of England officials discussed trading practices around key foreign-exchange benchmarks with senior currency dealers 18 months before regulators opened formal investigations into alleged rate-rigging.

Records of a meeting in April 2012 released yesterday by the central bank show dealers discussed the rules they were subject to when trading close to the times when key market benchmarks, such as the WM/Reuters rates, are set.

The traders, concerned by regulators’ scrutiny of instant messages in the London interbank offered rate probe, talked about how they shared information about orders to reduce the risk of losses in the minutes before benchmarks are calculated, said two people with knowledge of the meeting who asked not to be identified because the meeting was private. Investigators are deciding whether those communications amount to collusion.

The discussion raises the question of how much Bank of England officials, already criticized by lawmakers for failing to heed warnings Libor was vulnerable to abuse, knew about the potential for manipulation of the $5.3 trillion-a-day currency market before regulators opened their formal probes. Three members of the panel, two of whom were at the meeting held at BNP Paribas SA’s London office, have since been fired, suspended or put on leave by their firms.

‘Chummy Relationship’

“It’s highly concerning that this issue wasn’t escalated,” said Austin Mitchell, a member of Parliament from the Labour Party and former member of the U.K. Treasury. “It talks to the chummy relationship between the Bank of England and the committee members, in which the banks were trusted to get their own house in order. That has been a clear policy for years but is no longer acceptable.”

The Bank of England was given responsibility for regulating banks in April 2013 when the incoming Conservative government disbanded the Financial Services Authority amid criticism its light-touch approach to regulation had contributed to the financial crisis.

The chief dealers’ subgroup, set up in 2005, brings together Bank of England officials with 11 spot traders from the world’s largest banks, according to a filing last year. They met three times in 2012 to discuss issues such as the state of the market and the impact of impending rules.

‘Brief Discussion’

“There was a brief discussion on extra levels of compliance that many bank trading desks were subject to when managing client risks around the main set piece benchmark fixings,” according to the summary of the April 23, 2012 meeting of the chief dealers’ subgroup of the Bank of England’s foreign exchange joint standing committee.

Bank of England officials declined to comment on whether the use of instant-message groups to communicate orders was raised at the meeting.

In an e-mail, the central bank said it “takes the issue of manipulation extremely seriously and, through its market knowledge and intelligence gathering, is supporting the FCA in its investigation, and will take all necessary steps,” referring to the Financial Conduct Authority, which regulates British financial markets.

That Bank of England officials may not have appreciated the importance of the conduct that the people with knowledge of the meeting said traders flagged to them is credible, according to Conservative lawmaker Mark Garnier as well.

‘Big Deal’

“This doesn’t surprise me at all,” said Garnier, who sits on Parliament’s Treasury Committee. “I suspect that a lot of people at the BOE could have known all about it without recognizing what a big deal it was at the time.”

Regulators are examining evidence first reported by Bloomberg News in June that traders at the world’s largest banks colluded to manipulate the WM/Reuters rates, used by money managers to determine the value of holdings in different currencies. At least a dozen firms have been contacted by authorities and more than 13 traders have since been suspended, put on leave or fired.

At the center of the inquiries are instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia.” Their members exchanged information on client orders and agreed how to trade at the fix through the messaging platforms, five people with knowledge of the investigations said last month.

Traders on the chats say they were merely matching buyers and sellers ahead of the fix to minimize losses by avoiding trades at a time when prices typically fluctuate the most.

Libor Criticisms

Citigroup Inc.’s former head of G-10 spot currency trading Rohan Ramchandani was on several of the message groups, people with knowledge of the investigation have said. He was present at the April meeting and has since been fired. Niall O’Riordan, suspended as co-chief dealer by UBS AG, was also present at the meeting. JPMorgan Chase & Co.’s London-based chief dealer, Richard Usher, another member of the panel, was absent. He has since been put on leave by his firm.

No individual has been accused of any wrongdoing. Spokesmen for UBS, BNP Paribas and JPMorgan declined to comment. Messages left on O’Riordan and Ramchandani’s mobile phones were not returned. Usher couldn’t be located through online searches or directory assistance.

In 2012, the Bank of England was criticized by lawmakers for failing to act on signs Libor, the benchmark for $300 trillion of securities worldwide, was vulnerable to rigging.

Federal Reserve

The Bank of England and the New York Federal Reserve discussed flaws in the rate-setting process for Libor in 2008 -- but didn’t act because the benchmark fell outside their jurisdiction. Rate-rigging continued at several of the largest banks for another two years, according to regulatory filings.

The WM/Reuters rates for 160 currencies, used as a benchmark by companies and investors around the world, are determined by trades executed in a minute-long period called “the fix,” starting 30 seconds before 4 p.m. in London.

The data is collected and distributed by World Markets Co., a unit of Boston-based State Street Corp., and Thomson Reuters Corp. Bloomberg LP competes with Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.

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