The US Federal Reserve is investigating whether traders at the world’s biggest banks rigged benchmark currency rates, raising the risk that firms will be penalized for lax controls as regulators look for wrongdoing.
The Fed is among authorities from London to Washington probing whether traders shared information that may have let them manipulate prices in the US$5.3 trillion-a-day foreign-exchange market to maximize their profits, said a person with direct knowledge of the matter, asking not to be named because it is confidential.
“The Fed has discretion whether to and how much to fine the banks if deficient controls or lack of supervision resulted in traders at these banks manipulating currency rates,” said Jacob Frenkel, a former US federal prosecutor and now a lawyer at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland.
The Fed punished firms for internal-control lapses last year as it worked with US state and federal authorities on cases involving Iranian sanctions and botched derivatives bets. The foreign-exchange inquiry looks at benchmark WM/Reuters rates used by companies and investors around the world.
Deutsche Bank AG, Citigroup Inc, Barclays PLC and UBS AG control more than half of all foreign-exchange trading, according to a May survey by Euromoney Institutional Investor.
Bloomberg News reported in June last year that traders at banks have been manipulating spot foreign-exchange rates for at least one decade, affecting the value of funds and derivatives. Britain’s Financial Conduct Authority, the Swiss Competition Commission and the US Justice Department also are investigating.
At least a dozen banks have been contacted by authorities, and at least 12 currency traders have been suspended or put on leave. Companies including Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC have announced their own internal reviews of the matter.
Citigroup said last week it fired Rohan Ramchandani, who was head of European spot trading. Ramchandani was part of a message group other traders in the industry referred to as “The Cartel,” which is under investigation. He had been on leave from the New York-based firm for almost three months. Ramchandani did not respond to messages left on his mobile telephone, and his lawyer did not return a call to his office.
The Fed fined JPMorgan Chase & Co, the nation’s largest lender by assets, US$200 million last year after a UK trader known as the “London Whale” for his outsized bets lost more than US$ 6.2 billion on botched derivatives transactions.
Other recent Fed enforcement actions include a US$50 million penalty last month against RBS, which is based in Edinburgh.
The Fed faulted the firm for inadequate risk management and legal- review policies that are needed to prevent transactions with countries subject to US economic sanctions.
Authorities are looking for manipulation in a widening list of benchmark financial rates, including the London interbank offered rate, or LIBOR, and ISDAfix, used to determine the value of interest-rate derivatives.
“Because foreign-exchange regulation is largely nonexistent, the task falls to the Fed to use its regulatory powers to ensure that the banks address all controls associated with currency trading,” Frenkel said.