Osborne to target foreign exchange manipulation in City clean-up

Pound coins on dollar notes

The obscure and complicated foreign exchange market is to be the next target of Treasury action, I have been told.

The chancellor is working with Whitehall officials and the international Financial Stability Board (FSB) on new regulations which will be imposed on the market. At the moment, foreign exchange (known in City shorthand as "forex") is largely unregulated and left to the bank traders who execute deals on behalf of global companies. Companies use forex deals to move money between different currencies and a large part of the market is dealt through London.

One senior official I have spoken to agreed that the public would be "very surprised" that such a major market was clearly open to abuse. The Treasury is likely to announce a set of measures to "clean up the market", probably in the next fortnight.

The prices in forex are set by traders who are doing the deals. Traders are able to pick a selection of the trades they have been asked to execute, meaning they can choose those most advantageous to their bank. The prices are set at the 4pm "fix", a daily City benchmark against which currencies are priced. I have written a short "How It Works" at the end of this blog on the allegation that forex is manipulated.

Regulators around the world including the Financial Conduct Authority (FCA) in London and the US Department of Justice are investigating allegations of forex manipulation. It has been reported that at least 15 banks are involved and nine are thought to have suspended or fired traders. No allegations have been proved and no admissions of fault made.

Martin Wheatley, the head of the FCA, said the allegations, if substantiated, could be "every bit as bad as Libor", referring to the revelations three years ago that the market which governs how banks lend to each other was regularly fixed.

As forex is an international market governed by international rules, the UK government is limited in what it can do alone. That is why it is working with the FSB - chaired by the Bank of England governor, Mark Carney - which is due to produce a major report on controlling the market at the G20 summit in Brisbane in the autumn.

Options include ensuring that a broader selection of trades are included in setting the price of forex deals; making the trading transparent on electronic trading platforms; limiting the negotiations between traders before the prices are set and changing the trading culture with the possibility of new professional codes of conduct for those executing trades. A single "fix" at 4pm could also be changed, giving a wider range of prices for currencies.

More importantly for Mr Osborne, there is a wider political point he wants to make, I am told. If the public is to regain trust in the financial system, then people must have faith that the markets are operating fairly. Allegations of manipulation around Libor and forex undermine that trust and leave the public believing there is one rule for them and another rule for "insiders", those close to the chancellor believe.

In a passage of his important speech on Inclusive Capitalism last week, Mr Carney laid out some of the key arguments which I am sure will be repeated by Mr Osborne in the near future. "In recent years, a host of scandals in fixed income, currency and commodity markets have been exposed," Mr Carney said. "Merely prosecuting the guilty to the full extent of the law will not be sufficient to address the issues raised. Authorities and market participants must also act to re-create fair and effective markets."

Ever the strategist, Mr Osborne is already looking towards the next general election in May 2015. Before the 2010 election, the then shadow chancellor made great play that Labour had failed on regulation and that the government was asleep at the wheel as the banks made hay (and lots of money) before the financial crisis.

The Coalition's nightmare scenario is that billions of pounds of forex fines are announced in 2015 and Labour accuses the government of a lack of action. Mr Osborne is looking intently at tightening the forex rules to try and head off just such an eventuality.

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The allegation - how forex could be manipulated
  • During the day, traders receive orders from clients - international businesses which need to buy and sell currencies to run their global operations.
  • Traders then discuss, often via telephone calls or electronic message chat rooms, the orders they have.
  • They can then trade in the market before the 4pm "fix" - the allegation being that they are essentially front running the market. If they know there are a lot of sterling orders coming, for example, they will buy the currency cheaply in the knowledge that the "fix" is likely to see the price of sterling rise.
  • Traders then start buying for their client - again ahead of the "fix". Each purchase pushes up the price.
  • The bank then charges the client at "the fix" - a higher price than the bank has actually paid.
  • The bank wins twice - it buys the currency itself cheaply and sells at the higher "fix". It also charges its clients more than it paid for the currency.
Kamal Ahmed Article written by Kamal Ahmed Kamal Ahmed Business editor

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  • rate this

    Comment number 30.

    I don't actually think there was a time when the 'professions' were decent and honest. We just know more now, it is harder to hide corruption.

    As far as prosecutions go, look at PPI. Millions paid in compensation, not one court case. I am waiting for the employees of these great institutions to file law suits for being made to commit fraud on their employer's behalves.

  • rate this

    Comment number 29.

    Every regulatory intervention has within it the seeds of the next crisis.

    As HisLardship so rightly points out, what is missing from the City is what traders would have got had they gone to Sunday School. Aggressive secularism is stunting people's moral compass and no amount of regulation will make a blind bit of difference.

  • rate this

    Comment number 28.

    Just charge the lot with fraud. Never have so many crooks got off so easily in the history of the world.

    If there is something they can do to make more cash for themselves they will do it.

    The whole industry has proved it needs pre big bang tighter regulations in everything they do.

  • rate this

    Comment number 27.

    If it sounds like a fix, looks like a fix and is spelt like a fix then guess what.

  • rate this

    Comment number 26.

    The City of London was founded and once operated on principles of trust, honesty and integrity. Now those qualities are in short supply owing to the rejection of Christian teaching in favour of the much superior secular order, surprise surprise we need regulation after regulation in an attempt to stop greed, self interest and fraud from bringing the City crashing down like a pack of cards. Oops!

  • rate this

    Comment number 25.

    Ditch the 'fix' and just trade...

  • rate this

    Comment number 24.

    Osborne's idea of cleaning up the market is to flag up his intentions to give those involved plenty of time to pocket their loot and hide it offshore or in property in their wife's name.

    People will only take this man, and the government, seriously when the first banker/dealer/trader goes to jail and has all of their property seized under the proceeds of crime legislation.

    Not there yet, George.

  • rate this

    Comment number 23.

    Unbelievable. I wonder if these guys in the city have something called a conscience! How can somebody operating a business do that to a client who trust them their hard earned cash? Beyond belief!

  • rate this

    Comment number 22.

    When is Gideon going to operate fairly and comply with the legally-binding Council of Europe ruling on State Benefits? The British people are being robbed of their lawful entitlement by a Cabinet of Millionaire Aristocrat Bully Boys who are waging a war against the poor:


    "We're all in it together" ?

  • rate this

    Comment number 21.

    So if the bankers don't `fix' it in their turn the state will `fix' it in its turn.

    No doubt at some point we will get a lecture on capitalism from Mr Osborne. There is no capitalism as most markets have been a corporate `fix' since the autumn of 2008.

    What needs to be done is a complete separation between retail and so-called investment banking. Then let free market capitalism rip.

  • rate this

    Comment number 20.

    The scandals in the City are a further symptom of a systemic problem. Any society or economy runs primarily on trust. We trust people to be honest and assume they expect the same from us. .

    By contrast if your starting point is that everyone is on the fiddle and legislate accordingly the entire system will collapse.

    We must address the cultural root of this problem or society has had it.

  • rate this

    Comment number 19.

    Wake up and smell the coffee....when has the price of anything not been subject to fixing...

  • rate this

    Comment number 18.

    "for Mr Osborne, there is a wider political point ... If the public is to regain trust in the financial system, then people must have faith that the markets are operating fairly."

    But they don't operate fairly, & people don't have any faith in them. Osborne's Government doesn't even operate fairly and most of us have zero faith in him or his government. Capitalism itself doesn't operate fairly.

  • rate this

    Comment number 17.

    Go on George - show them you can do it, AND ,put another nail in Labours Coffin it is full of dead wood anyway with no hopers like millipede and Balls.

  • rate this

    Comment number 16.

    There was a time when it was common knowledge that insider trading was rife in the City clubs.

    Is it any surprise that the culture simply moved on when there was a "clean up"?

    The same people are still in place.

    The same class.

    What else are they going to do?
    It is not as if they could do a proper job.

  • rate this

    Comment number 15.

    Once again it seems our Legislators are totally incapable of controlling the banks. I am no expert, but we do seem to have some very dishonest people in our banks. I just wonder if the Treasury has the knowledge and know how to control these institutions, perhaps the FSA (or whoever overseas banks) should start by suspending banks who have 'fiddled; the system.

  • rate this

    Comment number 14.

    ..err.. Should I be surprised to hear they fix forex? I'd be surprised if they didn't. Even more surprised if Osborne stops 'em.

    Look on the bright side: if they weren't working for banks they'd be burgling your house.

  • rate this

    Comment number 13.

    How the market worked was absolutely and not in the lease bit manipulation up to the point Kamal said they sell to client at the fix price.

    At that point they have diddled their clients.

  • rate this

    Comment number 12.

    Mr Carney said. "Merely prosecuting the guilty to the full extent of the law will not be sufficient to address the issues raised. Authorities and market participants must also...

    How about you start with prosecuting first and see where that takes us?

    So far we have seen NOTHING, and the robbery goes on and on and on...

  • rate this

    Comment number 11.

    9. CyranoinLondon

    As long as nobody is punished for the many billions stolen, and the bankers keep protecting each other with useless non-statements like yours, I will keep considering bankers (and the politicians they bought) as a criminal class.

    If you keep stealing, we will keep seeing you as thieves. Is that really that hard to understand?


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