BOE Heard Traders’ Currency-Rigging Concerns Years Ago

Bank of England officials knew of concerns the foreign-exchange market was being manipulated as early as July 2006, more than seven years before regulators opened formal probes into alleged rate-rigging.

The BOE yesterday released minutes of central bank meetings with traders from some of the world’s biggest banks where they discussed concerns that currency benchmarks such as the WM/Reuters 4 p.m. London fix were being manipulated. The central bank suspended an employee amid an internal investigation into allegations its officials condoned rigging, according to a separate statement.

At a July 4, 2006, meeting led by BOE chief dealer Martin Mallett at Smiths of Smithfield, a celebrity-chef-owned restaurant in the City of London, attendees said there was “evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix,” according to the minutes. “‘Fixing business’ generally was becoming increasingly fraught due to this behavior.”

The notes raise questions about whether the BOE could have done more to stop practices at the heart of investigations by authorities around the world of allegations traders colluded to rig rates. Foreign-exchange benchmarks like WM/Reuters are used to compute the day-to-day value of holdings and by index providers. Even small movements can affect the value of what Morningstar Inc. estimates is around $3.6 trillion in funds. The minutes also show central bank officials had heard of the issues long before a 2012 meeting, which was reported by Bloomberg News last month and spurred criticism by lawmakers.

Parliamentary Hearing

Governor Mark Carney will appear before the Treasury Select Committee next week to answer lawmakers’ questions on the foreign-exchange investigation and the central bank’s internal controls, according to a statement yesterday by Andrew Tyrie, chairman of the Parliamentary group.

“Alarm bells should be ringing when a central bank suspends staff in connection with market rigging,” says Simon Morris, a lawyer in CMS Cameron McKenna LLP’s London office.

Regulators are examining whether bank traders communicated with dealers at other firms and timed trades to influence benchmarks and maximize profits. Some exchanged information on instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia.” Over 20 traders -- some of whom were part of the BOE group whose minutes were released yesterday -- have been fired, suspended or put on leave by top currency-trading firms including Citigroup Inc., Barclays Plc and Deutsche Bank AG.

‘Rigorous Controls’

The BOE said yesterday the investigation has found no evidence to date its employees were involved in colluding to manipulate the foreign-exchange market. The BOE requires staff “to follow rigorous internal control processes,” according to the statement. The suspended individual, who wasn’t named, is being investigated and “no decision has been taken on disciplinary action.”

The Foreign Exchange Joint Standing Committee Chief Dealers Sub Group was formed in 2005 and brings together central bank officials with spot-currency traders. About three times a year, they would gather to discuss market issues. The minutes released yesterday chronicle meetings from its inception in 2005 through February 2013.

That was the last time the group met, and the central bank is now reviewing its future, according to a person with knowledge of the situation.

At a May 2008 meeting, a “large majority” of those present expressed “concern about the lack of transparency among some methodologies and the impacts in managing order flow and pricing liquidity at times of concentrated benchmarked interest such as the 4 p.m. London fix.”

‘Problematic Snapshot’

Two months later at a gathering at HSBC Holdings Plc’s offices in Canary Wharf in London, Brian Dawson -- then an executive at World Markets Co., a unit of Boston-based State Street Corp. -- gave a presentation on the methodology for calculating the WM/Reuters benchmark currency rates. During that discussion, “it was suggested that using a snapshot of the market may be problematic” and “could be subject to manipulation,” according to the minutes.

Mallett, the meeting’s chairman, said the dealers group would be “happy to communicate further with WM Company” on how to “enhance the model,” according to those minutes.

WM/Reuters rates are determined by trades executed in a minute-long period known as “the fix.” They cover 160 currencies and the data is collected and distributed by World Markets and Thomson Reuters Corp.

Lucy Davidson, a spokeswoman for State Street, declined to comment on the BOE statement or investigation.

15,000 E-Mails

Notes from a Dec. 11, 2013, meeting of the BOE’s governing body released last week show Carney told the Court of Directors he’d ordered a “full examination” of internal records. That review has examined 15,000 e-mails, 21,000 Bloomberg and Reuters chat-room records and more than 40 hours of telephone recordings, according to yesterday’s statement.

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

‘Doesn’t Condone’

The attendees were told not to take minutes of the meeting, the people said. One person wrote down what was said afterward and turned it over to the U.K. Financial Conduct Authority for its investigation. The BOE said it was looking into the matter after the Bloomberg report.

“This extensive review of documents, e-mails and other records has to date found no evidence that Bank of England staff colluded in any way in manipulating the foreign exchange market or in sharing confidential client information,” the central bank said yesterday. “The Bank of England does not condone any form of market manipulation in any context whatsoever.”

The BOE said the Court’s Oversight Committee will investigate if officials were involved in “attempted or actual manipulation of the foreign-exchange market,” aware of any such activity or if they were involved in the sharing of any confidential client information.

The committee has hired Travers Smith LLP as external legal advisers to prepare a report of the investigation that will be published in “due course.”

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