U.K. Prosecutors Open Foreign-Exchange Rigging Investigation

Jul 21, 2014 1:40 pm ET

(Updates with market researcher’s comment in eighth paragraph.)

July 21 (Bloomberg) -- U.K. prosecutors opened a criminal investigation into alleged manipulation of foreign-exchange benchmarks, more than a year after the British markets regulator first began a review.

The Serious Fraud Office is probing “allegations of fraudulent conduct in the foreign-exchange market,” the London- based agency said in an e-mailed statement today.

Authorities around the world have been investigating whether traders rigged the $5.3 trillion-a-day currency market after the Financial Conduct Authority opened its review last year. Regulators and prosecutors are scrutinizing whether dealers at the world’s biggest banks traded ahead of their clients and colluded to rig the WM/Reuters rate, a benchmark that pension funds and money managers use to determine what they pay for foreign currencies.

More than 25 traders have been fired, suspended or put on leave since scrutiny began last year. Banks including Citigroup Inc., Deutsche Bank AG, Barclays Plc and UBS AG, the top four currency dealers according to Euromoney Institutional Investor Plc’s annual survey, have said they are cooperating with the probes.

Spokesmen for the banks declined to comment on the SFO investigation.

DOJ Investigation

While the FCA has taken the lead in probing the allegations in the U.K., the U.S. Department of Justice has been investigating possible criminal angles to the matter since last year. Prosecutors there could bring charges and levy fines in the case as soon as this year, a person with knowledge of the affair said last month.

The widening probe may push more transactions onto electronic platforms, analysts have said. While traders have been replaced by machines in other markets such as equities, most currency trading takes place off of exchanges, forcing clients to rely on their dealers for market and order-book information.

In the long term, the investigation “will likely drive even more FX flow into electronic platforms and trading algorithms,” improving transparency in the FX market for institutional investors, according to Kevin McPartland, head of market-structure research at Stamford, Connecticut-based financial research firm Greenwich Associates.

‘Market Color’

Still, “the short-term impacts on customers will be negative as bank sales forces will provide less and less market color due to fears of even being perceived as saying anything deemed inappropriate by regulators,” McPartland said.

The SFO’s decision to wait to open an investigation of its own prompted criticism from British lawmakers, who said the alleged offenses were similar to those found in manipulation of the London interbank offered rate, or Libor.

The SFO is separately prosecuting a dozen people in London in the Libor inquiry. Seventeen individuals have been charged worldwide for alleged rigging of the interest-rate benchmark. The 12 men in London are accused of conspiracy to defraud, which carries a penalty of as much as 10 years in prison.

The Bank of England has also come under criticism from lawmakers in the currency-rigging affair. It suspended one employee and engaged an outside lawyer, Anthony Grabiner, to probe allegations central-bank officials condoned practices at the heart of the investigations.

‘Healthy Profit’

Grabiner has been contacting traders who attended a 2012 meeting of a BOE committee, according to two people with knowledge of the matter. The chief dealers’ subgroup would meet with central bank representatives a few times a year to discuss trends and issues in the market. Grabiner is looking into whether the officials condoned practices such as sharing impending customer orders with counterparts at other firms.

“If some of the big players in the market got together and put through some very large trades -- billions of dollars each - - then that could affect the market, so they can charge their clients a higher rate before covering it a few minutes later to make a healthy profit,” said Mark Taylor, a professor at Warwick Business School in Coventry, U.K. “You only have to move the market a small amount for a short period, and that could be worth millions of dollars for the banks.”

--With assistance from Suzi Ring and Gavin Finch in London and Elena Logutenkova in Zurich.