REFILE-Tougher FX rules in spotlight as UK's Osborne and Carney speak

Wed Jun 11, 2014 9:43am EDT

(Refiles to fix dropped letter in first paragraph)

* Osborne to speak at 2000 GMT, Carney 2015 GMT

* Plans for regulation of London currency trading expected

* Osborne may detail plans for new UK criminal legislation

* Carney may also address risks from house price boom

By David Milliken

LONDON, June 11 (Reuters) - Tougher rules for the world's biggest currency trading hub - including potential new criminal sanctions - are likely to be high on the agenda when Britain's finance minister and central bank chief address London's financial community on Thursday.

Finance minister George Osborne said last week he wanted to strengthen the integrity of London's financial markets in response to an investigation into the possible manipulation of daily foreign exchange benchmarks.

London is the main global centre for the $5-trillion-a-day trade in foreign exchange. Annual speeches by Osborne and Bank of England Governor Mark Carney at the Lord Mayor of London's ornate Mansion House residence provide a chance to show that rhetoric will translate into tough regulation.

Carney may also touch on measures to reduce risks to the economy from Britain's rapidly rising house prices. The BoE meets next week to finalise a twice-yearly report on financial stability, and is expected to consider tighter curbs on mortgage lending.

But Britain's housing market worries are likely to be overshadowed by the global push to reform codes of conduct for traders. The European Union will make rigging of financial benchmarks a specific criminal offence from 2016, subject to implementation from national parliaments.

Osborne may wish to regain the initiative by announcing a plan of his own to criminalise specific malpractice in English law and avoid accusations of being soft on financial wrong-doing in the run-up to a national election due in May 2015.

"He will be likely to suggest not only the criminalisation of the manipulation of benchmarks ... but he will also I think impose further measures of transparency," Marshall Bailey, chief executive of FX trade body ACI, told Reuters.

Foreign exchange is the least-regulated financial market in the world. Until the past year's concern about price rigging there had been little appetite to change this in Britain or abroad.

More than 40 currency dealers around the world have now been fired or suspended following claims that traders used client order information improperly to attempt to manipulate prices.

Even the BoE suspended an employee earlier this year after an internal investigation into "internal control processes".

No individual or bank has yet been formally accused of any wrongdoing, far less prosecuted under England's more general anti-fraud laws. ACI's Bailey said it was important to wait until investigations were concluded before passing judgement.

Osborne was more likely to set out general plans rather than very specific measures, he added.

"I think it is very unlikely that there will be announcements of anything other than intent," Bailey said.

Detailed rules are likely to be announced only after a report due in the next few weeks from the Financial Stability Board - a committee chaired by Carney which reports to leaders of the G20 group of major economies.

Past Mansion House speeches have set the ball rolling on major policy developments in Britain. Two years ago, Osborne and then BoE Governor Mervyn King announced the Funding for Lending Scheme which helped restart mortgage lending after the financial crisis.

Carney is also likely to want to address issues of market malpractice, said Philip Shaw, an economist at Investec.

Last month Carney said that as well as the prosecution of wrong-doers, financial markets needed higher ethical standards or they risked losing their legitimacy. (Editing by Ruth Pitchford)