Financial Finks: Ratting out to Regulators

chicago-river-1024x682 Financial Finks: Ratting out to Regulators

The investigations into alleged FOREX rate rigging have taken a new twist with revelations that investigators planted informants in various banks and convinced them to turn on their coworkers by secretly recording conversations and accessing other incriminating evidence. Now U.S. and British regulators stand ready to issue criminal indictments against traders suspected of collusion in manipulating FOREX markets.

Prepping the Fix

At 30 seconds before 4 p.m., a one-minute-long period known as the “fix” begins each day in the world of foreign currency trading. The significance of this one-minute period is that FOREX trades made during that time set the currency exchange rate benchmarks relied upon by global corporations, fund managers and investors worldwide to value contracts and other assets. Prices are checked, deals are completed, and the trading day has reached its zenith after just 60 seconds. But now allegations have surfaced that it was not only the firm’s client orders that were displayed on traders’ screens during that crucial period, but also those of competitor’s clients.

“The Cartel,” “The Bandits’ Club” and “The Mafia”

Apparently some traders held private chat sessions — with names suggestive of less than orthodox trade chatting — by which they exchanged information on each other’s client orders and agreed on how to trade at the fix. Both U.S. regulators and the UK’s Financial Conduct Authority (FCA) are looking into allegations that FOREX dealers — including those trading at major banks — colluded with each other via the chat rooms in order to “fix” the fix.

Biggest Market — Least Regulated

While sales of stocks and bonds that generally relate to pricing for a future date are highly regulated by government agencies, FOREX trading is a “spot trade” not considered to be an investment product and, therefore, is not subject to strict rules and regulations, although FOREX trading is a 5.3 trillion dollar-a-day market. According to former Delaware Sen. Ted Kaufman, “This is a market where there is no law, and people have turned a blind eye.” However, market laws regarding inside information and the sharing of confidential client information do apply to FOREX, and it is these laws that the suspect traders allegedly violated in their schemes to nudge the fix — even slightly.

FBI Moles Inside Banks

Although it is not yet clear which banks may have been infiltrated with informants working for government agencies, the situation seems to have involved existing employees engaging their coworkers in exchanges —conversationally and possibly electronically — regarding criminal wrongdoing and then recording the disclosures. The targeted banks have not been identified; however 12 major banks control over 80 percent of the spot FOREX volume.