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Scandalous Practices Sanctioned on Foreign-Exchange Markets

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Written By: Pedro Santiago – Forex Focus

One case follows another. Interest rates are no longer on the stage, but this time currencies are at the heart of a vast assumed manipulation business. Foreign-exchange (forex) markets are representing the world’s largest financial markets with $5,000 trillion a day. They are not as regulated as others, such as stock markets. And, until now, a few big players were dealing the majority of transactions.

Concentration of the market has helped manipulations.

According to the latest survey conducted by consultant Greenwich Associates, until 2015, five big dealers (Deutsche Bank, UBS, Citigroup, Barclays and JPMorgan Chase) were capturing 53 percent of the global volumes on currencies. At the time when all the scandals emerged, the forex market had a much higher concentration on currencies than on other asset classes. Today, according to the latest figures, Greenwich Associates estimates that the percentage of trading on the buy side amongst the top five dealers remains notably high at 44 percent. Regional dealers and trading firms are entering the market. Diversity is welcome for financial end-users, regulators and emerging dealers.

However, some currencies are still traded between a few hands.

By acting on illiquid and over-the-counter currencies, banks can vary their prices fairly easily to earn more money at the expense of customers. Of course, illiquid markets mean more risks and higher margins for the bank. But they may hide higher margins resulting from unfair agreements between banks. Between 2007 and 2012, traders from some banks (Barclays, JPMorgan Chase, Standard Chartered, BNP Paribas) manipulated such currencies as the South African rand, Russian ruble, Brazilian real, Turkish lira, South Korean won and Hungarian forint. Traders of those currencies exchanged information on transactions and clients to agree on certain levels of currency spreads that were comfortable for all the banks involved.

The banks also set up a system of false transactions during periods of low activity. The transactions were made between two banks, but were then cancelled quickly and out of sight. The purpose of these false transactions was to mislead the other traders, and to induce them to buy or sell foreign currencies. The traders also manipulated the exchange-rate indices of the ruble (CME/EMTA) and the Brazilian real (PTAX). At the end of 2016, Brazilian authorities fined five banks (Barclays, Citigroup, Deutsche Bank, HSBC, JPMorgan Chase) for $54 million, considering them to have manipulated the real. South African authorities are still investigating offences against their currency and are expected to return their verdict in July. A dozen establishments are involved.

Other forex-market practices are at the origin of other scandals. 

Investigations by regulators revealed abusive practices that were detrimental to bank customers. It was not only about emerging currencies or Reuters exchange indices. On derivatives and forex options, some practices have been criticized. “Barrier options” are exotic options that can be knock-outs, meaning they can expire “worthless” if the underlying exceeds a certain price, limiting profits for the holder and losses for the writer. They can also be knock-ins, meaning they have no value until the underlying reaches a certain price.

If it is a knock-out, its buyer is left without an option, and the one who sold it has every reason to be satisfied because it has cashed the premium. Banks regularly sell this type of option to customers and may thus be tempted to manipulate the price of the option currency. An example: in July 2012, BNP Paribas’ Asia options manager asked the yen trader in Tokyo to raise the dollar-yen parity beyond a certain threshold, according to a New York State Department of Financial Services report.

The way customer-relationship managers are exchanging information with traders is also criticized.

To secure their margins and commissions, discussions between customer-relationship managers and traders often take place, in a way to secure the bank margins and commissions of the sellers. The Chinese wall is sometimes breached, and traders know in advance the clients’ deals, for instance, and can even agree with relationship managers on an exchange rate that secures the bank’s margin and remuneration.

In a recent US lawsuit, the US Department of Justice charged HSBC Bank’s former head of forex cash trading (arrested in July at New York’s John F. Kennedy International Airport) and requested the UK extradition of another trader. US authorities accused them of $8 million in illicit profit after execution of a $3.5 billion forex deal in 2011 on behalf of a client, Cairn Energy. They supposedly cheated the Edinburgh oil company by buying pounds ahead of the deal, knowing it would push up the price of sterling that they were then reselling to the client at a higher price. The former head of the forex cash-trading desk pleaded not guilty to the charges, as he blamed other market conditions for the spike in price.

These practices are clearly now mentioned as “insiders exchange” in the new code of conduct from the Bank for International Settlements. And conflicts of interest are supposed to be chased and banned by banks. Until now the banks paid heavy fines. And, according to the Financial Times, five banks (Deutsche Bank, UBS, Barclays, HSBC, Royal Bank of Scotland) provisioned more than €10 billion for forex penalties relating to 2014 and 2015.

The scandals are not over yet.


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