How Do You Punish Market-Rigging?
Regulators in the U.K., the U.S. and Switzerland have moved with impressive speed to extract about $4.3 billion from some of the world's largest banks for their role in rigging global currency markets. Now comes the hard part: identifying and punishing the people who actually did the manipulating.
The settlements with six banks -- UBS, Citigroup, JPMorgan Chase, Bank of America, Royal Bank of Scotland and HSBC Holdings -- paint a picture that has become depressingly familiar from previous market-manipulation scandals, ranging from commodities to interest rates. Foreign-exchange traders profited at their clients' expense by abusing information about orders, and they conspired to influence London-based financial benchmarks that affected trillions of dollars in transactions and investments worldwide. The relevant transgressions went on from 2008 through late 2013, persisting even as some of the same banks were reaching settlements over the rigging of the London interbank offered rate, or Libor. At least one more bank, Barclays, is still working on a deal with authorities.
Details presented by regulators illustrate just how commonplace the manipulation of global benchmarks had become. Traders formed groups -- with names such as "the players," "the 3 musketeers" and "the A-team" -- that focused on specific currencies. Using private chat rooms, they routinely shared information about their clients' orders with the aim of pushing the WM/Reuters benchmark exchange rates, set at 4 p.m. London time, in the desired direction. "Hooray nice team work," one trader wrote after an apparently successful attempt to "whack" the British pound.
Misbehavior on such a scale could not have happened without the participation -- or at least the willful blindness -- of numerous actual people, most likely including senior managers. So it's encouraging that the U.K. Serious Fraud Office and the U.S. Department of Justice are conducting criminal investigations, which the latter expects to result in charges sometime next year.
Unfortunately, the prosecutors won’t be able to build cases as strong as they could have been. They came late to the game, starting their investigations only after Bloomberg News published its first reports on the manipulation in 2013. Beyond that, London's foreign-exchange markets have existed in a legal gray area, where no laws expressly prohibit manipulation.
Two changes would significantly improve the chances of deterring future misbehavior. First, regulators should routinely screen markets for suspicious activity. Simple statistical analyses were all journalists needed to see that something was wrong with benchmarks for currencies and interest rates. The earlier prosecutors are alerted, the better their chances of establishing the full scope of wrongdoing.
Second, benchmark rigging should be a crime in itself. Its repercussions extend far beyond the traders involved, undermining confidence in markets that play a crucial role in the global economy. The U.K. is already planning to make manipulation a criminal offense by the end of this year, and the European Union has directed its members to do the same by 2016.
The foreign-exchange case illustrates that good market design alone doesn't prevent rigging: The currency benchmarks already met guidelines that were created in the wake of the Libor revelations. Regulators also need to pay attention, and prosecutors need laws to enforce.
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