BOE Staff Said to Have Condoned Currency Traders’ Conduct
Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, a practice at the heart of a widening probe into alleged market manipulation, according to a person who has seen notes turned over to regulators.
A senior trader gave his notes from a private April 2012 meeting of currency dealers and two central bank staff members to the Financial Conduct Authority about six weeks ago because of mounting media coverage of the investigation, said the person, who asked not to be named while probes are under way.
Traders representing some of the world’s biggest banks told officials at the meeting that they shared information about aggregate orders before currency benchmarks were set, three people with knowledge of the discussion said. The officials said there wasn’t a policy on such communications and that banks should make their own rules, according to the people. The notes could drag the U.K. central bank into another market-rigging scandal two years after it was criticized by lawmakers for failing to act on warnings that Libor was vulnerable to abuse.
If traders can show “they made Bank of England officials aware of practices in the FX market some time ago, then the bank will be at risk of being characterized as having endorsed, by its silence and inaction, the very practices which are now under investigation,” said Simon Hart, a lawyer at RPC LLP in London.
A spokeswoman for the Bank of England declined to comment about the 2012 meeting beyond what was contained in a summary provided to Bloomberg News last month. Those notes included a reference to “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.” No further details of the discussion were provided.
“The Bank of England has already released its record” of the meeting, the central bank said in a statement today. “We are continuing to support the FCA in its investigations.”
The central bank had no responsibility for regulating U.K. lenders until April 2013. Chris Hamilton, a spokesman for the FCA, which supervises British markets, declined to comment.
“Allegations that banks may have been rigging the forex market are extremely serious, particularly for firms but also for regulators who had been telling Parliament that banking standards were improving,” Andrew Tyrie, the British lawmaker who led an inquiry into practices in the banking industry following the Libor scandal, said in a statement today.
Dealers at the April 2012 meeting with Martin Mallett, the Bank of England’s chief currency dealer, and James O’Connor, who works in its foreign-exchange division, were told not to record the discussion or take notes, one of the people said. One trader wrote down what was said soon after leaving because of concerns spawned by investigations of attempted manipulation of the London interbank offered rate, or Libor, the person said.
Two traders at the meeting -- Citigroup Inc. (C)’s Rohan Ramchandani and UBS AG (UBSN)’s Niall O’Riordan -- are among at least 20 employees of global banks who have been fired, suspended or put on leave since Bloomberg News first reported in June that dealers said they shared information about client orders to manipulate benchmark rates used in the $5 trillion-a-day currency market, the world’s biggest.
No firms or traders have been accused of wrongdoing by government authorities. Mallett and O’Connor didn’t respond to e-mails or return phone calls seeking comment. Ramchandani, who was fired, said he couldn’t comment. O’Riordan, who was suspended, didn’t respond to a message left on his mobile phone.
At the center of the inquiries are instant-message groups such as “The Cartel” and “The Bandits’ Club.” Their members, which included Ramchandani, exchanged information on client orders and agreed how to trade at the fix, the one-minute window when benchmark rates are set, five people with knowledge of the probes said in December.
The U.S. Justice Department, the Federal Reserve, the Swiss Competition Commission and the European Commission are among more than a dozen authorities on three continents investigating currency-trading practices. New York’s top financial regulator, Benjamin Lawsky, has asked more than a dozen banks, including Goldman Sachs Group Inc. (GS) and Deutsche Bank AG (DBK), for documents related to foreign-exchange trading, Bloomberg News reported this week, citing a person familiar with the matter. Spokesmen for those two banks declined to comment.
The 2012 meeting was one of three held that year by the chief dealers’ subgroup of the Bank of England’s Foreign Exchange Joint Standing Committee. The group was set up in 2005 to bring central bank officials together with spot traders from the world’s largest banks to discuss market issues.
The April session, held at BNP Paribas SA (BNP)’s London office on Harewood Avenue, was led by Mallett, according to the Bank of England summary. In addition to O’Connor, Ramchandani and O’Riordan, more than half a dozen traders from lenders including Royal Bank of Scotland Group Plc were in attendance, two of the people with knowledge of the meeting said.
During a 15-minute conversation on currency benchmarks, traders said they used chat rooms to match buyers and sellers ahead of the fix to avoid trading at one of the most volatile periods of the day, the people said. That required them to share aggregate positions. They instigated the discussion because they were concerned that similar practices were under scrutiny at the time in the Libor investigations, the people said.
The Bank of England officials said they viewed the practices as positive to reduce market volatility and wouldn’t take the matter to the standing committee, according to the people with knowledge of the meeting. That body included a representative from the Financial Services Authority, the FCA’s predecessor, according to central bank records.
By pooling information on client orders, current and former traders interviewed by Bloomberg News have said they could gain an impression of probable moves in currency markets, knowledge they said they sometimes used to place their own bets before the benchmark WM/Reuters rates are set at the 4 p.m. London close.
Spokesmen for Paris-based BNP, New York-based Citigroup, Edinburgh-based RBS and Zurich-based UBS declined to comment.
The Bank of England, then under the leadership of Mervyn King, was criticized by lawmakers in July 2012 for failing to act on warnings about Libor, the benchmark interest rate used for $300 trillion of securities. While the U.K. central bank and the Federal Reserve Bank of New York discussed flaws in the rate-setting process for Libor in 2008, the benchmark fell outside their jurisdiction -- a conclusion the U.K. Parliament’s Treasury Select Committee agreed with in a 2012 report. Rate-rigging continued at several of the largest banks for years, according to findings by the committee.
“The Libor scandal demonstrated regulators need to be extra vigilant about how key benchmarks are set,” said Pat McFadden, a member of Parliament who sits on the Treasury Select Committee. “The Bank of England has taken over hugely increased responsibilities, but that system will only work if it shows a strong appetite for investigating any suggestion of improper market behavior.”
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