When Mark Carney agreed to take the job as Britain's central bank governor, he knew it would be tough but he could not have expected to become a character in a trashy novel about global finance. Consider the latest twist in the plot: The Bank of England has suspended a senior official and launched an investigation into whether its staff knew of or condoned manipulation of the multi-trillion dollar foreign exchange market.
This particular scandal emerged in rumours last summer that forex traders were colluding to rig the market by manipulating the WM/Reuters rate, a daily currency fix based on trades in a one-minute window observed every day. Dozens of traders have been sacked or suspended following investigations over three continents. The Hollywood image of sweating, shirt-sleeved traders crouched over screens in dealing rooms in Wall Street has been joined by something more convivial, old world and clubby in the City of London.
It transpires, according to a bundle of documents released yesterday by the Bank of England under Freedom of Information regulations, that a committee made up of chief forex dealers from leading banks and Bank of England officials had concerns about trading behaviour as long ago as 2006. The Foreign Exchange Joint Standing Committee for Chief Dealers likes to conduct its business over lunch, preferably with proper napkins and silverware, at pukkah City establishments.
At one such eatery, Smiths of Smithfield (known for its choice cuts of beef), discussion at the July 2006 meeting turned to the formulation of benchmarks and "it was noted that there was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix. . . It was noted that 'fixing business' generally was becoming increasingly fraught due to this behaviour."
Last month, Martin Wheatley, chief executive of the U.K. Financial Conduct Authority, suggested that the the allegations about forex manipulation were as bad as the Libor affair. Nothing so far has emerged in evidence to suggest that it is as bad, but the smoke is billowing. The suspension of a Bank of England official (who is as yet under no accusation), the launch of an investigation by the Bank's court of directors into the issue of manipulation and the commissioning of a report by a City law firm into the matter, indicates that Mr. Carney is burning the midnight oil over this one.
For him, this is a no-win situation because whatever he does or does not do, there are powerful forces in Brussels at the European Commission, and in the United States, who would love to see the City of London stumble. The $5-trillion (U.S.) forex market is the jewel in the City of London's crown and while the Bank of England has no specific jurisdiction over it, the Bank's foreign exchange committee produces a code of conduct and monitors the development of the market. Moreover, the Bank itself is a significant player in the market, trading £13-billion ($23.9-billion) in currency volumes annually.
The Bank insists that it has found no sign of manipulation in its extensive review of documents. However, the sin, if there is one, is likely to be one of omission rather than action. What the Bank seems to be investigating is whether or not its officials failed to sound the alarm when the whiff of hanky-panky wafted over the lunch table.
If that is the case, Mr. Carney needs to act vigorously, if not brutally, to end the culture of complacency that seems to have infected the Bank of England. The Forex market is entirely different to the fixing of Libor rates, which was conducted with impunity within the internal organisations of banks. Forex "fixes" are based on actual trades, rather than the self-assessments that made up the Libor rates, and the allegations of manipulation seem to relate to efforts to push benchmarks to benefit a bank's internal position or in order to front-run their clients.
It would be fantastic to assume that the Bank of England was involved in the latter. The risk to the Bank's reputation lies rather in that it was asleep or indifferent to the risk that a group of forex traders were trying to turn the world's biggest market place into a personal ATM machine.
Carl Mortished