FNMA Fannie Mae (QB)

Broad government scrutiny of possible market rigging has deepened with a probe by the U.K.'s financial watchdog into trading of British government bonds by Lloyds Banking Group PLC, according to people familiar with the matter.

The Financial Conduct Authority's inquiry, which is at an early stage, is examining whether Lloyds traders sought to increase their profits, either by driving down the prices that the British bonds, known as gilts, fetched in government auctions, or by artificially inflating their prices when the bonds were sold on to other investors, one person said.

The investigation is currently focused on individual traders at Lloyds and isn't a broader industrywide probe into the massive gilt market, one person said. Lloyds in recent months has been handing over information to the FCA, and some of its traders have retained outside lawyers, the people said.

The probe is yet another front opening in government investigations into the manipulation of crucial markets. Since 2012, authorities in the U.S., Britain and elsewhere have levied more than $10 billion in penalties on some of the world's biggest banks for trying to rig widely used interest-rate and foreign-exchange benchmarks. As a result of those cases, those banks have been obligated to turn over to prosecutors any evidence of additional wrongdoing, spurring further probes.

Now, markets ranging from U.S. Treasurys to debt issued by global quasigovernmental agencies have drawn attention from law-enforcement authorities. And while major banks have settled currency probes focused on trading between euros and U.S. dollars, the Justice Department still is looking at individuals involved in some of those cases, and could bring charges later this year, some of the people said. Other probes are focused on possible manipulation of other currencies, such as the Russian ruble and the Brazilian real.

Taken together, the continuing investigations suggest banks will remain in the cross hairs of prosecutors and regulators for many months with the potential for new, sizable penalties. They also appear to indicate that problems that at first appeared limited to a handful of markets may be more widespread than that.

One active investigation centers around debt issued by subsovereigns, supranationals and agencies, or SSAs, which is currently worth $2.4 trillion in outstanding instruments, according to Barclays' bond indices.

The U.S. Justice Department and other regulators are looking at whether traders at different institutions colluded to set prices in those markets, according to people familiar with the matter. The FCA has been assisting the Justice Department in that investigation, which focuses in large part on London-based traders, some of the people said.

Companies including Bank of America Corp's Merrill Lynch and Nomura Holdings Inc. recently have suspended London-based traders in connection with the Justice Department's investigation in the market for SSA bonds, according to regulatory records and people familiar with the matter. Reuters earlier reported the suspensions, and said traders at Credit Suisse and Cré dit Agricole are also under investigation.

This group of SSA borrowers includes the World Bank and the European Investment Bank, which raise billions of dollars every year to invest in development projects. In the U.S., such issuers include mortgage-finance giants Fannie Mae and Freddie Mac.

As previously reported by The Wall Street Journal, the market for trading in U.S. government debt also has come under scrutiny by the Justice Department and regulators. A number of banks have been turning over information as authorities, including the Securities and Exchange Commission and the Commodity Futures Trading Commission, seek evidence of possible manipulation.

Previous investigations were aided by strong evidence of traders openly discussing their efforts in Bloomberg chat rooms. Some of the continuing probes, including the further currency investigations, so far haven't unearthed as much strong evidence, people familiar with the matter said. Government and internal bank investigators in the inquiries are examining recordings of phone calls between traders for similar evidence, which is a more time-consuming process, the people said.

In some of the cases, U.S. prosecutors still are trying to determine whether there is a strong U.S. connection to justify bringing a case, including whether harmed customers were based in the country, since much of the trading occurred overseas.

The SSA bond investigation and the continuing foreign-currency probes are similar to earlier cases in the interest-rate-benchmark and currency markets, which invoked antitrust theories that multiple banks had colluded to set prices. But the Treasurys manipulation probe, being handled by the Fraud Section at the Justice Department, is focused on whether traders at individual banks used customer information to trade ahead of them, people familiar with the probes said.

Write to David Enrich at david.enrich@wsj.com, Aruna Viswanatha at Aruna.Viswanatha@wsj.com and Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

January 07, 2016 02:25 ET (07:25 GMT)

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