Foreign Exchange, the Biggest Market, Is Also Fixed by the Big Banks

Foreign Exchange, the Biggest Market, Is Also Fixed by the Big Banks

June 13, 2013 • 12:10PM

Five “whistleblower” foreign-exchange traders from at least three different megabanks, have told Bloomberg News that the nearly $5 trillion foreign exchange-rate market is fixed. “The world’s biggest banks manipulated benchmark foreign-exchange (FX) rates used to set the value of trillions of dollars of investments and derivatives” — in particular, investments of pension funds all over the world — Bloomberg reported on June 12.

It should not be forgotten that then-Treasury Secretary Tim Geithner, who knew from 2008 onward about the banks’ rigging of LIBOR (interest-rate swaps), made an intervention regarding the Dodd-Frank Act in 2011, insisting that FX derivatives be specifically exempted from any regulation.

The venue for the foreign-exchange rate-rigging is London, as usual. The leading distributor of FX rates is Thompson-Reuters International, as with LIBOR. The rigging has been going on for at least 10 years, “affecting the value of funds (including pension funds) and derivatives”. The British Financial Conduct Authority, having also received a complaint of rigging from a major European funds manager, is “considering opening a probe” (“the optics, my dear fellow, for the optics”).

Essentially, the traders told Bloomberg, that major banks make a regular practice of trading against their clients in this, the financial world’s largest market, by “front-running” their clients’ trades in the 60-second windows in which trading is supposed to be paused. Bloomberg was told by veteran traders that “Dealers colluded with [derivatives] counterparties to boost chances of moving the rates…. The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade… the two traders said.” It is the same kind of investment bank scamming which Sen. Carl Levin’s Permanent Investigations Subcommittee exposed Goldman Sachs to have done habitually in the mortgage-backed securities and MBS derivatives markets.

Bloomberg observes, “The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges” — as Geithner insisted must continue to be the case. The Federal Reserve “bailed out” the foreign-exchange market with large injections of liquidity when it threatened to freeze up in late 2008.

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