Foreign-exchange dealers discussed the technical challenges of trading around a fixing rate rather than their own attempts to manipulate FX market rates in meetings of a subcommittee of the Bank of England (BoE) FX joint standing committee (FXJSC) that date back to 2006, according to senior BoE officials.
Testifying before the UK Treasury Committee on Tuesday, Paul Fisher, executive director for markets at the BoE, who was head of foreign exchange up until 2009, said while recently published minutes of a 2006 meeting of the chief dealers’ subgroup (CDSG) allude to “evidence of attempts to move the market around popular fixing times”, the minutes had been misinterpreted as evidence of manipulation.
The discussions at CDSG meetings – which have been widely scrutinized over the past week after the BoE announced on March 5 it had suspended a staff member as part of its internal review into FX market manipulation – had come about as banks had found the increasing participation of large hedge funds in the market was having an effect on price volatility in the run-up to the popular 4pm fix, said Fisher.
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| Paul Fisher, executive director for markets at the BoE |
“I have never come across myself in any of these meetings or discussions specific allegations of people rigging the market ... in particular, the allegations now about the dealers themselves colluding to rig markets,” Fisher told MPs. “It would be very odd for them to have come to one of these meetings and said: ‘We’ve been rigging the markets, what do you think?’ That’s not going to happen.
He added: “What they’re complaining about here is the activities of other people who are stopping them doing what they want. Basically you can think of this as a lot of traders whinging about how difficult their life is and we weren’t going to have much sympathy with that.”
While the CDSG minutes might not prove any wrongdoing, Fisher acknowledged the severity of the allegations officials might have been aware of or even condoned FX market manipulation.
According to BoE governor Mark Carney, who appeared alongside Fisher on Tuesday, the bank first became aware of the allegations on October 16, 2013, after they were communicated by a private-sector market participant and the head of enforcement at the Financial Conduct Authority (FCA).
The matter was immediately escalated and external legal counsel was subsequently engaged, said Carney.
The BoE has not published the name of the employee it suspended last week, but as several years’ of CDSG minutes were published simultaneously, attention has focused on the activities of the CDSG and the FXJSC that sit above it, both of which bring central-bank officials together with senior market participants on a regular basis to discuss technical industry issues.
Since Fisher was promoted to his current role in 2009, the bank’s foreign-exchange division has been headed up by Michael Cross, a 24-year BoE veteran who also chairs the FXJSC.
Cross’s team is responsible for managing FX reserves on behalf of the UK government and also trading in the FX market to hedge currency exposures for government departments. The FX trading desk is managed by chief dealer Martin Mallett, who has chaired the CDSG since its inception in 2005.
Central banks have no statutory oversight for the FX market, which is largely self-regulated, but the FXJSC has been in place in the UK since 1973 and a similar committee structure has been replicated in other main financial centres.
However, Carney hinted on Tuesday that changes might now need to be made to the way the market operates. A Financial Stability Board working group, co-chaired by Fisher, is reviewing the use of FX benchmarks and will report to the G20 leaders’ summit in Brisbane in November, but further changes might also be warranted, he said.
“We will consider jointly with the Treasury and the FCA in the context of all those other changes whether there are any other regulatory changes that might be warranted to this market to ensure that it is a true, fair, open market, as people have the right to expect,” said Carney.
The BoE will also publish a new strategic plan on March 18, which will include the creation of a fourth deputy governor position, with responsibility for markets and banking. Once appointed, that new official will conduct a “root-and-branch review” of how the bank conducts and uses market intelligence.
“The bank has to be beyond reproach,” said Carney. “We have to have the highest standards of integrity. We also need to more clearly establish what the principles are around a fair market.
“What we saw in Libor and what the FCA and other authorities around the world are investigating in the FX markets around fixes are symptomatic of a group of individuals in markets who have lost sight of what a real market is, and that’s unacceptable.”