Reports have surfaced that the Federal Reserve is examining potential currency rigging by the world’s largest banks. The Fed authorities, along with investigators in London, are concerned with determining whether traders shared information to influence the foreign exchange market to generate higher profits for themselves. Bloomberg reported the investigation after being informed by an anonymous source.
Daily volume for the Forex market is approximately $5.3 trillion. The market has been under intense scrutiny as regulators around the world attempt to uncover potential market manipulations. Banks are taking notice, and changing how business is conducted. In December, Reuters reported that JPMorgan Chase & Co. (NYSE:JPM), and Deutsche Bank AG (NYSE:DB) were extending online chatroom bans. Chatroom transcripts were used in the Libor scandal investigations, and there is potential for their use in current Forex probes as well.
Benchmark rates are set daily during “the fix,” which occurs at 4 p.m. in London each day. Traders have a one-minute window where they can manipulate the rate depending on when they place orders–either before or during the timeframe. Transcripts could be used to see if bankers were collaborating on trade placement to influence rates. Citigroup Inc.‘s (NYSE:C) head of European spot foreign exchange trading, Rohan Ramchandani, was allegedly involved in one thread, (named “the Cartel”) which is currently under investigation. On January 10, Reuters contacted Citigroup spokesperson Danielle Romero Apsilos, who said Ramchandani “is no longer with Citi.” The spokesperson declined to comment regarding whether or not he had been fired due to the rate-rigging investigations.
The November minutes of the Federal Reserve Bank of New York’s Foreign Exchange Committee indicate that major banks believe the probes will shape the future of currency trading.There has been no “notable impact on market liquidity or market function,” according to those present. However, clients are beginning to ask more questions, and ”demand for executing transactions at these fixing rates remained steady.”
“Private sector members suggested that any investigations and/or supervisory activity related to this subject could eventually result in recommended changes to best practice guidance,” according to the minutes. Barclays PLC (NYSE:BCS), JPMorgan, Deutsche Bank, and The Goldman Sachs Group (NYSE:GS) were among attendees.
Jacob S. Frenkel, a former federal prosecutor and now a lawyer at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland explained the Fed’s regulatory power to Bloomberg. “The Fed has discretion whether to and how much to fine the banks if deficient controls or lack of supervision resulted in traders at these banks manipulating currency rates,” Frenkel said. “Because foreign-exchange regulation is largely nonexistent, the task falls to the Fed to use its regulatory powers to ensure that the banks address all controls associated with currency trading.”