Carney Ordered Full Examination of Records in BOE FX Probe

Mark Carney told Bank of England directors that he ordered a “full examination” of internal records for a probe into allegations that officials condoned practices behind the currency-manipulation scandal.

The governor described the scope of the investigation to the BOE’s supervisory board, known as the Court of Directors, on Dec. 11 in London, according to minutes of the meeting. Also present at the gathering were the central bank’s three deputy governors and its chief operating officer, Charlotte Hogg.

“The governor referred to regulatory investigations into apparent attempts by traders to manipulate foreign exchange markets,” the Court’s minutes said. “It had been suggested that the bank had been aware of the potential for manipulation and that the matter had been discussed at the meeting of a market committee chaired by the bank. The bank initiated in October a full examination of records, with external legal assistance, and Court would be informed of the outcome.”

Bloomberg News reported on Feb. 7 that senior currency dealers at banks including Citigroup Inc. and UBS AG told BOE officials at an April 2012 meeting that they discussed positions ahead of key benchmarks and matched buyers and sellers ahead of the fix to avoid trading then. Central bank representatives said they viewed the practices as positive to reduce market volatility and banks should formulate their own policies, according to three people with knowledge of the matter.

2012 Meeting

Dealers at the 2012 meeting were told by the BOE officials present not to record the discussion or take notes, a person with knowledge of the discussion said earlier this month.

Andrew Bailey, chief executive officer of the BOE’s Prudential Regulation Authority, told U.K. lawmakers on Feb. 11 that management are taking the claims “very seriously,” and the central bank “does not condone any form of market manipulation.”

Such scrutiny might encourage officials to review the nature of future interractions with market participants. The probe centers on meetings held by the chief dealers’ subgroup of the BOE’s Foreign Exchange Joint Standing Committee. Carney’s comments in the Dec. 11 minutes don’t indicate how long the investigation could take or hint at its outcome.

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. It held three meetings in 2012.

Scandal Criticism

The allegations have dragged the BOE into another market-rigging scandal less than two years after it was criticized by politicians for failing to act on warnings that the London interbank offered rate was vulnerable to abuse. The central bank had no responsibility for regulating U.K. lenders at the time.

At the December meeting, Court directors reviewed management responses to recommendations as part of an internal review commissioned after the Libor criticism. These included a database for all e-mails that would be searchable in the event of any dispute or formal investigation. It would not be part of the normal records system.

The directors said the internal review should be published and that progress on its recommendations should be reported to the BOE’s Oversight Committee in the first half of 2014.

Among other matters discussed in December, Hogg said work on the McKinsey & Co.-led strategic review of the BOE was “progressing” and was “about halfway through.” Findings of a staff survey conducted as part of the plan had been received, the minutes said.

Communications Risk

Directors also asked Executive Director for Communications Nils Blythe on the response by the BOE to indications from market intelligence that communications was the most significant risk to the central bank.

“Blythe emphasized the closer co-ordination between Monetary Policy Committee members and the press team, and the increasing public awareness of the Financial Policy Committee and its role,” the minutes said. “This had reduced the risk of mixed messages, and helped to promote more co-ordinated presentation of policies.”

Finance Director Ralph Coates told the Court that BOE income was likely to be 35 million pounds ($58 million) below budget in the year to February, mostly due to lower-than-expected participation in the central bank’s Funding for Lending Scheme. Coates also said spending would be 8 million pounds under budget, citing “headcount shortfalls” at the PRA.

The minutes also reveal concerns within the board of the PRA about the regulator’s ability to conduct asset-quality reviews of banks. One option would be to hire external parties to carry out studies, according to the document.

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