Biggest Banks Said to Overhaul FX Trading After ScandalsJulia Verlaine and Gavin Finch
The world’s biggest banks are overhauling how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation.
Barclays Plc, Deutsche Bank AG, Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and UBS AG, which together account for 43 percent of foreign-exchange trading by banks, are introducing measures to make it harder for dealers to profit from confidential customer information and take advantage of clients in the largely unregulated $5.3 trillion-a-day currency market, according to people with knowledge of the changes.
Banks have capped what employees can charge for exchanging currencies, limited dealers’ access to information about customer orders, banned the use of online chat rooms and pushed trades onto electronic platforms, according to the people, who asked not to be identified because they weren’t authorized to discuss their firms’ practices.
“This is finally bringing the FX market into the 21st century,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics who specializes in the governance of banks. “What we’re seeing is a modernization of processes that probably should have been brought in 15 or 20 years ago.”
The banks are acting after authorities on three continents opened probes into allegations that dealers leaked confidential client information to counterparts at other firms and colluded to rig currency benchmarks used by money managers. U.S. and U.K. regulators are in talks to settle some of the probes as soon as November. Prosecutors in the U.S. are preparing to file charges against traders as soon as next month, two people with knowledge of the matter said.
The scandal may cost lenders as much as $15 billion in fines, according to Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London.
Regulators are probing allegations that traders shared data about orders with people at other firms using instant-message groups with names such as “The Cartel” and “The Bandits’ Club,” and with clients in a bid to win business. One focus is whether dealers sought to move the WM/Reuters rates in their favor by pushing through trades before and during the 60-second windows when the benchmarks are set.
Britain’s Financial Conduct Authority this year ordered banks to review their rules about conflicts of interest in the foreign-exchange market, a person with knowledge of the talks said. The regulator also plans to evaluate the controls that firms have over traders around the time benchmarks are set, according to its business plan. Chris Hamilton, a spokesman for the FCA, declined to comment.
“The banks are very concerned about what the regulators are going to do, and this makes them look good,” said Colin McLean, founder and chief executive officer of SVM Asset Management Ltd. in Edinburgh, which oversees more than $900 million. “Maybe they think it protects them somewhat from future regulatory changes.”
RBS and Barclays this year stopped traders and salespeople from seeing colleagues’ forthcoming deals and their banks’ buy and sell orders in aggregate, four of the people said. Such information is useful for traders looking to protect themselves or profit from future market moves, they said.
RBS now segregates client requests for currency trades at the benchmark rate from the rest of the order book, according to two of the people. Only the trader handling the order at the reference rate is able to see it. The Edinburgh-based bank also stopped taking orders at WM/Reuters rates for some emerging-market currencies, which are more vulnerable to manipulation because they’re less widely traded, the people said.
At Barclays, deals of more than $20 million now show only basic information, two people said. If a salesperson or trader tries to view the details of the order on the firm’s internal computer system, a pop-up box appears, warning them that their interest will be logged and an e-mail sent to compliance.
Spokeswomen for RBS and London-based Barclays said they couldn’t comment on compliance procedures.
Before regulators started their investigations, most banks’ order books were visible to employees on the desk, and traders and salespeople would routinely pass on information about large deals to their best clients in a bid to secure future business, according to six people with knowledge of trading practices. Clients frequently requested such tips, the people said.
The information would allow customers, including hedge funds, to place their own bets in the knowledge that the market probably would move when a currency reached a certain level, according to the people. Some clients would threaten to withhold business from a lender who didn’t comply, they said.
The amount of information about customer orders that bank sales teams are passing to clients has dwindled to almost nothing, according to an investor at one of Europe’s largest money managers who asked not to be identified because he wasn’t authorized to speak publicly.
“With regulators particularly sensitive to any activity that even appears improper, trading-desk employees do not want to create any perception that client confidences are being breached,” said Kevin McPartland, head of research for market structure and technology at Stamford, Connecticut-based Greenwich Associates.
Even so, the measures being taken won’t completely stop all information from leaking as traders will find a way around the restrictions, the investor said.
While banks can limit access to details about client orders on their computer systems, they can’t keep employees from talking to one another. Some traders also are communicating with clients and counterparts at other firms via Snapchat, a mobile-phone application that sends messages that disappear, to circumvent their company’s controls, according to a person with knowledge of the practice.
Another focus of regulators is the hidden charges firms have been levying on customers. Since foreign-exchange dealers don’t charge a commission, as traders do in equities markets, their profit is determined by how much better a rate they can get than what they offer clients.
Bloomberg News reported in June that banks including New York-based Goldman Sachs were charging less-sophisticated clients excessive markups. Since then, the firm has prohibited its Alpha desk, which deals with hedge funds that specialize in equities and trade currencies infrequently, from adding more than 30 basis points to trades, one of the people said. A basis point is 0.01 percent.
Managers at Deutsche Bank have advised foreign-exchange employees that they shouldn’t charge a markup on straightforward buy and sell orders in actively traded currencies where the Frankfurt-based lender isn’t assuming any risk, according to two people with knowledge of the matter. In June, the U.S. Justice Department started asking bankers and clients how much sales teams charge customers to exchange currency.
Spokesmen for Deutsche Bank and Goldman Sachs said they couldn’t comment. Jeffrey French, a spokesman for New York-based Citigroup Inc., the world’s biggest foreign-exchange dealer according to a Euromoney survey, declined to comment about whether the bank has changed its currency-trading practices.
“For some of the more naive clients, there is still probably gaming going on by the banks because the incentives are there for doing so,” SVM’s McLean said. “These changes look like fig leaves.”
The probes and demands for greater transparency are accelerating the shift of trading onto computer platforms. While equities are predominantly traded electronically on exchanges, the majority of currency deals are over the counter, forcing clients to rely on their dealers to trade and for market and order-book information. The proportion of foreign currency traded electronically has climbed to about 73 percent this year from 43 percent in 2005, according to Greenwich’s McPartland.
Goldman Sachs is encouraging clients who placed their orders via e-mail to trade through its own electronic platform. That takes away the opportunity for salespeople to see how a currency moves before providing a rate and to charge the highest rate over a period of hours. UBS, based in Zurich, is encouraging more clients to use its electronic-trading platform, Neo, according to a person with knowledge of the development. A spokesman for the lender declined to comment.
“People who want to have early-mover advantage, as some of these banks have demonstrated by implementing changes, are taking some risks since they don’t know what the regulators may conclude,” said Marshall Bailey, who as president of ACI represents more than 13,000 people working in financial markets, including foreign exchange. “Given the hundreds of millions of dollars of fines for misconduct they may potentially face, the risk is worth it.”
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