LONDON--The U.K. financial regulator Wednesday said it is
gathering information on potential manipulation of benchmark
foreign-exchange rates, amid new allegations that traders at banks
are rigging rates to maximize profits.
Bloomberg News earlier Wednesday reported that employees at
unidentified banks have been front-running client orders and
rigging WM/Reuters rates by pushing through trades before and
during the 60-second windows when the benchmarks are set, citing
dealers with knowledge of the practice. Dealers colluded with
counterparts to boost chances of moving the rates, according to two
of the unnamed people cited in the story.
The data behind the rates are collected and distributed by World
Markets Co., part of State Street Corp. (STT). Thomson Reuters
Corp. (TRI) contributes data and has a co-branding agreement on the
products.
"The FCA is aware of these allegations and has been speaking to
the relevant parties," a spokesman for the regulator said. He said
he couldn't comment further.
The fresh allegations of market manipulation come nearly a year
after Barclays PLC (BCS) acknowledged that some of its employees
had tried to manipulate benchmark interest rates including the
London interbank offered rate, or Libor. UBS AG (UBS) and Royal
Bank of Scotland Group PLC (RBS) have since admitted that some of
their staff also tried to rig interest rates and the three banks
were collectively fined around $2.5 billion.
Fund managers and index providers use the WM/Reuters
foreign-exchange rates to value their holdings and assess
performance. The rates are based on actual trades or quotes, but,
according to the Bloomberg story, can be manipulated by traders
concentrating orders in the moments before and during a 60-second
window before scheduled rate-setting times.
For example, "one trader with more than a decade of experience
said that if he received an order at 3:30 p.m. to sell 1 billion
euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m.
fix, he would have two objectives: to sell his own euros at the
highest price and also to move the rate lower so that at 4 p.m. he
could buy the currency from his client at a lower price," Bloomberg
reported. The trader would profit from the difference between the
reference rate and the higher price at which he sold his own euros,
the trader told Bloomberg.
"In our role as administrator of the WM/Reuters FX rates, we
publish spot fixings for the major currency pairs that are derived
from actual executed trade data [or, in certain circumstances,
order rates] received from multiple execution venues through a
streaming rather than solicitation process. The process for
capturing this information and calculating the spot fixings is
automated and anonymous and the rates are monitored for quality and
accuracy," a spokeswoman for State Street said.
A spokesman for Reuters referred questions on the matter to
State Street.
-Write to Margot Patrick at margot.patrick@dowjones.com
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