FX Rates Said to Face Global Regulation in Libor Review

Global regulators may start overseeing currency rates in a widening response to benchmark-rate setting scandals that began with revelations on the manipulation of Libor, two people familiar with the matter said.

The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks, including the WM/Reuters rates, as soon as next month, said the people, who asked not to be named because the talks aren’t finalized.

The U.K. Financial Conduct Authority, which oversees markets and prosecutes financial crime, is looking into potential manipulation in the $4.7 trillion-a-day foreign-exchange market after being contacted by a whistle-blower in March. The regulator has sent requests for information to four banks, including Deutsche Bank AG and Citigroup Inc., according to one of the people.

“All benchmarks share similar vulnerabilities so there is a need for a framework that applies to all benchmarks to ensure their integrity and restore market confidence,” Chantal Hughes, a spokeswoman for European Union Financial Services Commissioner Michel Barnier, said in an e-mailed statement. “We will also be making a proposal this summer on the framework for benchmarks.”

Libor Oversight

The FCA “will review” Iosco’s recommendations and decide which rates to oversee, spokesman Chris Hamilton said. Martin Wheatley, the regulator’s chief executive officer, has already taken on oversight of the London interbank offered rate after his review of how the rate is set.

Sebastian Howell, a spokesman for Deutsche Bank, and Jeffrey French, a spokesman for Citigroup, declined to comment on the FCA requests.

Iosco proposed in January that rates used in “currency markets, which can be represented by specific or aggregate benchmarks,” be subject to regular audits, stricter oversight from regulators and a code of conduct for submitters. The WM/Reuters rate would be included under this definition, one of the people said.

The currency market, the biggest in the financial system, is one of the least regulated as it takes place away from exchanges. Traders colluded with counterparts at other firms to boost chances of moving the WM/Reuters rates, according two people with knowledge of the manipulation.

State Street

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 New York-based 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.

“The process for capturing this information and calculating the spot fixings is automated and anonymous, and the rates are monitored for quality and accuracy,” State Street said in an e-mailed statement. The data are derived from “multiple execution venues through a streaming rather than solicitation process,” the company said.

Spot foreign-exchange transactions aren’t considered financial instruments in the same way as stocks and bonds. They fall outside the EU’s Markets in Financial Instruments Directive, which requires dealers to take all reasonable steps to ensure the best possible results for their clients.

Singapore Rigging

Singapore’s monetary authority yesterday censured banks for trying to rig interest rates, ordering them to set aside as much as S$12 billion ($9.6 billion) at zero interest pending steps to improve internal controls.

ING Groep NV, Royal Bank of Scotland Group Plc and UBS AG were among 20 banks at which 133 traders tried to manipulate the Singapore interbank offered rate, swap offered rates and currency benchmarks in the city-state, the Monetary Authority of Singapore said in a statement. The regulator said it will also make rigging key rates a criminal offense and bring supervision under its direct oversight.

Nineteen firms were asked to each post reserves ranging from S$100 million to S$1.2 billion -- depending on the severity of the attempts by their traders to manipulate rates -- for a year and will earn zero interest on that money, MAS said.

Sibor, used to price debt ranging from commercial term-loans to homeowners’ mortgages, is calculated daily on behalf of the Association of Banks in Singapore. For the local currency rate, a poll is conducted of the 11 contributing banks to ask how much it would cost to borrow Singapore dollars from each other for different periods from one month to 12 months. Some of the highest and lowest quotes are excluded, and the remaining are averaged and published at 11:30 a.m. in Singapore.

U.S. Regulators

U.S. financial regulators, including the Office of the Comptroller of the Currency, which regulates national banks, may also have a role in examining the possible manipulation of currency benchmarks.

“The agency takes the allegations in the article very seriously and is working with other regulators, domestically and internationally, to look into these concerns,” said Bryan Hubbard, an OCC spokesman, referring to the Bloomberg report on the matter.

His agency keeps an eye on foreign-exchange trading at the banks it regulates for how the activity affects the wider health of the firms. The Federal Reserve does the same at the holding companies it regulates. Barbara Hagenbaugh, a Fed spokeswoman, declined to comment.


The Commodity Futures Trading Commission has some limited foreign-exchange enforcement power.

“The CFTC does seem to have a role here, just as it did for the Libor investigations,” said Darrell Duffie, a finance professor at Stanford University who has studied derivatives markets.

Steve Adamske, a CFTC spokesman, declined to comment on how it might respond to the benchmark manipulations.

Representative Maxine Waters, top Democrat on the House Financial Services Committee, said in a statement that this “most recent addition to a long list of improprieties” at the big banks should push regulators to look further into reference-rate reforms. “It is clear that these systems remain vulnerable to fraud and abuse.”

The U.S. Treasury Department has come under fire in the wake of this week’s manipulation revelations. Treasury excluded foreign-exchange swaps and forwards last year from certain regulations in the 2010 Dodd-Frank Act.

U.S. Lawmakers

This foreign-exchange activity should never have been excluded, according to U.S. lawmakers including Waters and Senator Carl Levin, whose Permanent Subcommittee on Investigations has repeatedly probed the financial system. That exemption affects a different type of trading -- swaps and forwards -- not the spot markets.

Even with the exemption, those “swaps and forwards remain subject to the Dodd-Frank Act’s requirement to report trades to repositories and rigorous business conduct standards, including those related to fraud, manipulation, and other abusive practices,” Suzanne Elio, a Treasury spokeswoman, said in an e-mailed statement.

Indonesia’s Deputy Finance Minister Mahendra Siregar said that “the government and regulators are participating in improving governance and transparency” internationally.

Jonathan Li, a spokesman for Hong Kong’s Securities and Futures Commission, and Hiroshi Okada, a spokesman for Japan’s Financial Services Agency, declined to comment.

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