Treasury Targeting FX Reform

For several months now, George Osborne has been planning to make manipulation of foreign exchange, fixed income and commodities benchmarks a crime in order to maintain London’s status as an international banking and markets hub. The upcoming reforms will be informed by a review by the Bank of England, Treasury and Financial Conduct Authority (FCA) into the operation of financial markets and the scope of regulation of wholesale markets. With the FCA and other regulators investigating the FX markets amid rigging allegations, Osborne is eager to demonstrate that he is taking strong action as an election looms in 2015.

 The initiative for reform comes in the wake of the Libor scandal, a series of fraudulent actions linked to the Libor (London Interbank Offered Rate), which is an average interest rate calculated through submissions of interest rates by major banks in London. It gauges the rate that banks would be charged if borrowing from other banks. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades or to give the impression that they were more creditworthy than they were. 

Nonetheless, despite being one of the biggest financial markets in the world, used daily by companies to transfer vast sums of money between jurisdictions and currencies, the foreign exchange market has largely escaped official regulation.

The administration of Libor is now a regulated activity overseen by the FCA. Knowingly or deliberately making false or misleading statements in relation to benchmark-setting has been made a criminal offence in the UK. In addition, a new code of conduct outlining the systems and controls that firms must have in place in relation to Libor. For example, each bank must now have a named person responsible for Libor, accountable if there is any misconduct. The banks must keep records so that they can be audited by the regulators if necessary.

Nonetheless, despite being one of the biggest financial markets in the world, used daily by companies to transfer vast sums of money between jurisdictions and currencies, the foreign exchange market has largely escaped official regulation. Prices for transactions are usually set by traders involved in the deals. The Treasury now wants to introduce a more formal pricing system and greater transparency. Plans include using electronic trading platforms, broadening the trades that impact the pricing, and imposing new codes of conduct. Manipulating the foreign exchange market is expected to be made a criminal offence, in line with the measures introduced in the UK last year in the wake of the Libor rigging scandal.

However, some parties counsel caution. According to David Walker, chairman of Barclays, the foreign exchange market needs “fine tuning” rather than heavy handed reform. Walker was speaking recently as he unveiled a new compliance academy aimed at raising standards within the bank. He said that while the FX market was “vulnerable to taint” it had worked well for a very long time and that the focus now should be on ensuring better conduct by traders.

Barclays is one of several leading FX dealers that are at the centre of a global investigation by more than 15 authorities into alleged collusion and rate-rigging in the $5.3tn a day currency markets. Its directors have been trying to clean up the bank’s reputation in the wake of the Libor manipulation scandal but have struggled to win over sceptics amid further enforcement probes.