A new scandal in the world of finance is about to burst into full view.
For months, there have been reports that U.S. and European authorities were looking into alleged manipulation of global currency markets, a vast trading arena where $5.3-trillion (U.S) changes hands on a daily basis.
Now U.S. federal prosecutors – who almost never comment publicly on ongoing investigations – are making it official.
Eric Holder, the U.S. Attorney-General, recently granted a rare interview to discuss the currency-trading probe.
"The manipulation we've seen so far may just be the tip of the iceberg," he told The New York Times in an article published last week. "We've recognized that this is potentially an extremely consequential investigation."
In other words: watch this space.
The investigation so far has focused on a group of traders at different banks working in London, New York and Tokyo who exchanged messages in online chat rooms – including one that went by the name "The Cartel," according to The Wall Street Journal. At least a dozen traders at several banks – including Barclays PLC, UBS AG, Citigroup Inc. and JPMorgan Chase & Co. – have been suspended as the probe continues, the paper reported.
No wrongdoing has yet been alleged by authorities on either side of the Atlantic in the currency probe. But investigators have zeroed in on a particular point in the trading day: the moment when the daily benchmark rates for each currency are set. Unlike the stock market, the currency markets do not operate on an exchange but through over-the-counter trades between banks. There is no "close" to the market; the active trading sessions simply gravitate around the globe, from Asia to Europe to the U.S.
However, there are times when benchmark rates are set. The main one is a brief window around 4 p.m. in London, which then determines the exchange rates used to calculate the daily value of investments around the world. Authorities are trying to discover whether traders colluded to manipulate those rates for their own benefit. Such a ploy would be reminiscent of the scandal surrounding the rigging of the London interbank offered rate, or Libor. In that case, bankers responsible for submitting estimates for a critical benchmark interest rate manipulated their submissions in order to assist their colleagues' trading books.
The investigation will shine a spotlight on the world's currency markets, which are vast and little understood. Such trading is also very lightly regulated and faces far less scrutiny than many other types of financial products.