RBS Said to Abandon Some FX Benchmarks Amid Regulatory Probe

Jan 28, 2014 7:46 am ET

(Updates with restrictions in fifth paragraph.)

Jan. 28 (Bloomberg) -- Royal Bank of Scotland Group Plc has contacted clients telling them it is abandoning some of the currency benchmarks it will accept orders for amid global investigations into the foreign-exchange market.

The Edinburgh-based lender also said it would sometimes be necessary to trade ahead of benchmarks such as the WM/Reuters rates in order to manage market risk, according to a copy of the e-mail seen by Bloomberg News. That may move the market for or against the client depending on the size of the order, RBS said.

“We understand that FX fixing order execution is important to our customers and we intend to continue offering this service in selected currencies,” RBS said in the e-mail. “It is important for you to be aware that in order for RBS to appropriately manage market risk, we may enter the market ahead of the fix.”

RBS’s overhaul of its currency trading operations reflects an industry in flux as authorities on three continents examine instant messages and phone records for evidence of collusion and senior traders are suspended or fired. In June, Bloomberg News reported that dealers pooled information about their positions, executed their own trades before client orders and sought to manipulate benchmark rates by pushing through trades around the 60-second windows when they are set.

Seven Benchmarks

As of Feb. 8, RBS will accept orders on seven benchmark rates including the 9 a.m. and 4 p.m. WM/Reuters London fixes and the 4 p.m. New York close, the bank said. It will also take trades for the 1:15 p.m. European Central Bank fix.

The e-mail didn’t detail how many benchmarks the bank currently provides services for.

Investors and senior traders have seen a shift away from trading at the fix, said David Woolcock, chairman of the committee for professionalism at ACI. The Paris-based group, which represents 13,000 currency and money-market traders in 60 countries, is looking into amending its code of conduct to include guidelines for trading around fixes, Woolcock said.

At a November meeting of the Federal Reserve Bank of New York’s foreign-exchange committee, bank executives said the investigations probably would result in changes in the way traders are taught to handle client orders.

RBS has already suspended two currency traders and handed over records of an instant message group to regulators after concluding a former senior dealer’s communications with counterparts at other firms were inappropriate, according to a person with knowledge of the matter in November.

‘High Standards’

RBS’s foreign exchange sales team contacted some clients in October, pledging the bank wouldn’t share details of their orders or use them to make proprietary bets, according to an e- mail read to Bloomberg News at the time.

“No traders or proprietary system will take any position on the back of your order,” the RBS sales team said in the Oct. 23 e-mail. “Our usual high standards of client confidentiality will apply.”

Banks also are overhauling rules governing how traders communicate ahead of benchmarks. Goldman Sachs Group Inc., RBS, UBS AG, JPMorgan Chase & Co. and Citigroup Inc. banned employees from taking part in chat rooms involving other banks. That put an end to the multi-dealer conversations used by traders to agree on transactions, share gossip and exchange tips on business flows.

WM/Reuters rates are published hourly for 160 currencies and half-hourly for the 21 most-traded. They are the median of trades in a minute-long period starting 30 seconds before the beginning of each half-hour. Rates for less-widely traded currencies are based on quotes during a two-minute window.

The data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp., and Thomson Reuters Corp. Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters in providing news and information as well as currency-trading systems.

--With assistance from Liam Vaughan in London. Editors: Heather Smith, Jesse Westbrook