By Jamie McGeever and Carmel Crimmins
LONDON, March 7 In July 2006, during lunch at an
upmarket restaurant overlooking the sprawling Smithfield meat
market in the City of London, Bank of England officials and
senior bank dealers discussed evidence of potential manipulation
of the foreign exchange market. People at the lunch said the
attempts to move the market meant the process of establishing
official prices - known as "fixing" - was becoming "increasingly
It was two years before the issue was discussed again,
according to minutes from the meetings, released after a Reuters
freedom of information request, and seven years before the
Financial Conduct Authority (FCA), Britain's financial
regulator, kicked off a global investigation and banks started
to suspend or layoff traders.
The FCA probe focuses on whether traders used advance
knowledge of customer orders to try and manipulate benchmark
foreign exchange rates for their own gain, and is a blow to the
"hands off" approach to regulating the world's largest financial
The fact that Bank of England officials knew about possible
manipulation and seemingly did not act, raises questions for
one of the world's most powerful central banks. A central bank
employee has been suspended and an internal probe launched into
allegations its staff condoned or were aware of market rigging.
The Bank said that an internal review had so far found no
evidence that its staff colluded in any manipulation or shared
confidential client information.
British lawmakers will next week question Bank of England
boss Mark Carney, and other officials about their oversight of
currency trading in London, the global hub for foreign exchange
Regulators have compared the alleged manipulation to the
rigging of benchmark interest rates, or Libor, two years ago.
Back then, Barclays released an email written by its
then chief executive, Bob Diamond, that appeared to suggest Paul
Tucker, the former deputy governor of the Bank of England, had
known that Barclays was submitting artificially low rates to the
Libor-setting process during the financial crisis.
Tucker later told a parliamentary committee that he did not
know or approve of the "low-balling" of Libor submissions.
Of course, much has changed in the six years between that
London lunch and now. Back then, "financial centres were
inclined to avoid excessive over-burdening of financial
institutions in order to keep their centres competitive," said
Lorenzo Bini Smaghi, a former member of the executive board and
governing council at the European Central Bank. Now "the
pendulum has changed from light touch to much more intrusive
But the latest scandal underscores that even in the new
world of regulation and supervision that followed the 2007-08
financial crisis, the market for foreign exchange, with daily
volumes of $5.3 trillion, remains one of the least regulated
TRANSPARENT AND FLUID
Operating 24 hours a day, across all time zones, the foreign
exchange market - unlike that for shares or commodities - does
not have a centralised location for trading. Participants deal
directly with one another either over the phone or
Various financial centres have developed voluntary codes of
conduct for FX trading but they are not legally binding. In FX,
unlike on the stock market, short-selling or betting on a fall
in the price of an asset is virtually unrestricted.
This arrangement has worked on many levels. Despite the
market's size, foreign exchange trading is really a cash
transaction between two counterparties that does not create the
sort of systemic risks seen in other markets, such as credit
derivatives, which blew up in 2008.
The ease of buying and selling foreign exchange has boosted
global growth, helping to smooth the path of international
trade. Daily foreign exchange volumes have trebled since 1998,
according to data from the Bank for International Settlements.
"The FX market is the world's biggest fruit and vegetable
store," said Jim O'Neill, a former chief currency economist at
Goldman Sachs and currently visiting Research Fellow at
Bruegel, a Brussels-based think tank.
"It is the most transparent and liquid market on the planet."
Some 40 percent of all FX trades take place in London. The
British capital's heritage as the centre of a vast, trading
empire, along with its English language and time zone between
Asia and America make it a natural venue for FX dealing.
The Bank of England does not have formal regulatory
oversight of the FX market. The FCA is in charge of monitoring
markets for misconduct such as insider trading and collusion.
But the BoE does maintain close relations with senior foreign
exchange dealers to ensure it knows what is going on in the
market and to fulfill its remit to uphold financial stability.
The Bank has chaired an industry committee made up of
dealers, brokers and corporate treasurers since 1973. On the
initiative of Bank of England chief dealer Martin Mallett, it
created a smaller group in 2005 made up of senior dealers.
This sub-group, chaired by Mallett, held its inaugural
meeting at Imperial City, a Chinese restaurant close to the Bank
of England, according to the minutes released this week.
It continued to meet in a series of eateries, including an
Argentinian steak house, until late 2007 when banks' offices
were used instead.
After 2006, concerns over manipulation around the fixing
were only raised again in meetings in 2008 and April 2012.
The meeting in April 2012 is now critical to the whole saga.
It was held at the offices of French bank BNP Paribas
as the UK media exposed electronic messages showing how traders
colluded with each other to rig the Libor market. Traders told
Mallett that currency dealers were using chat rooms to pool
information before benchmark FX rates were fixed.
A source familiar with the investigation said that Mallett
told senior dealers at that meeting not to take notes and not to
expect minutes about that part of the debate. Mallett could not
be reached for comment. The Bank of England has said it has
reviewed emails, minutes and other documents as part of its
internal review into the FX allegations. It declined further
At least one trader has filed his own personal account of
the meeting with Britain's Financial Conduct Authority (FCA),
"for safekeeping," according to a person who has seen the notes.
The FCA has declined to comment.
CENTRAL BANK INTERVENTION
The scandal has the potential to shake up the way the
foreign exchange market operates.
The fluid nature of FX markets suits governments and central
banks which want the freedom to intervene in order to support
their currencies. Many traders argue that itself amounts to
The lack of regulation also makes the foreign exchange
market susceptible to abuse from private traders. During the
1980s and 1990s, there were instances of traders and brokers
trying to collude to manipulate the price of certain currency
Traders expect the latest scandal to accelerate the trend
towards more trading on electronic platforms and push more
dealing on to exchanges.
Official attitudes towards market misconduct have hardened
since taxpayers had to pour trillions into saving the global
financial system. Banks themselves have been quick to react to
the FX probe, suspending or dismissing 24 traders, handing over
reams of data to regulators and cracking down on the use of
online chat rooms, where groups of traders allegedly hatched
plans to rig rates using names such as "The Cartel", according
to sources familiar with the matter.
No one has been charged with any wrongdoing, but banks know
the trouble they could face. The international investigation
into Libor manipulation saw 10 financial firms fined $6 billion
and 13 individuals charged.
Martin Wheatley, chief executive of Britain's financial
watchdog, said last month that the allegations in the FX probe
were "every bit as bad" as Libor, but warned that it would
likely be next year before he is able to publish the findings of