Forex scandal: What is that all about?

Canary Wharf London is the centre of a global foreign exchange market that trades around the clock and is worth more than £3tn a day

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Yet another scandal is brewing in the City of London.

The authorities have been investigating suggestions that some foreign exchange traders have, for years, colluded to artificially fix foreign exchange rates.

It comes just a couple of years after the sensational revelations about banks rigging the vital Libor interest rate.

And the Bank of England has been accused of knowing about it, but doing nothing - something it denies.

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What is this "forex scandal"?
Bureau de Change

It is an apparent scandal involving, supposedly, the rigging of rates in the foreign exchange market. This is the so-called forex market in which banks and other financial businesses buy and sell currencies to each other. It is a massive market in which more than £3 trillion worth of currencies are traded globally every day, dwarfing the value of dealing on the stock market. About 40% of the world's dealing goes through trading rooms in London.

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So who has done what?

Forex traders at at least 10 UK and foreign banks, including Barclays and RBS, are being investigated to see if they colluded to set benchmark rates each day at 4pm. Although forex trading goes on 24 hours a day around the world, for the past 20 years or so a reference rate has been developed for use by corporate customers who want a simple, fair and transparent rate set for them each day. So manipulating it, if possible, could be very valuable indeed.

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What has the Bank of England got to do with it?
Bank of England The Bank of England has now been dragged in to the forex investigation

The Bank has been embarrassed by recent allegations that at least one of its senior officials actually knew this sort of thing was going on as far back as 2006 but did nothing to stop it, or did not realise it might be a bit fishy. One senior Bank official was recently suspended while the Bank makes its own enquiries. It is worth noting that the Bank does not oversee or regulate the forex market in the UK. But as one of its roles is to ensure the stability of the pound against other currencies it has its own dealing room and dealers who trade on the Bank's behalf. And the Bank keeps a close eye on what is going on - or should do.

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How did this alleged rigging happen?

The suggestion is that dealers at several banks colluded over a number of years by using instant messaging systems and online chat rooms to discuss where it would be most favourable to set the day's benchmarks. A bit like the previous Libor scandal which has seen a host of banks fined hundreds of millions of pounds for wrong doing.

Libor scandal: Can we ever trust bankers again?

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So what are the authorities doing?

It emerged last autumn that the Financial Conduct Authority in the UK had been looking at these allegations since the early summer. It has been joined in an international investigation by counterparts in countries like the US, Switzerland and Hong Kong. No-one has been found guilty of anything yet, but a number of traders at a variety of banks have been suspended for the time being.

The Chancellor announced proposals to make it a criminal offence to manipulate the foreign exchange, bond and commodity markets in his annual Mansion House speech.

In doing so he will opt-out of a European directive, which is also due to make market manipulation a criminal offence but doesn't come into force until 2016.

The UK however has an opt-out when it comes to criminal justice matters, so can choose to ignore the relevant directive.

Treasury sources said their own rules could be at least as tough as the directive or go even further.

It is expected the new rules will be in place by the start of 2015.

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But isn't the forex market all about speculation?

Yes, the vast majority of trading has nothing to do with financing international trade, corporate deals or providing holidaymakers with foreign cash. Short-term and long-term speculation is what most trading is about. You might think that a bit of collusion to fiddle things would naturally be part and parcel of such a business. But it shouldn't be. Large corporate firms such as credit card companies that might use the 4pm rate could end up being cheated.

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