Blog 20th Feb 2014

The FCA investigates additional benchmarks

On 4th February the Treasury Select Committee heard evidence from, amongst others, Martin Wheatley, the Chief Executive of the Financial Conduct Authority. During a hearing lasting a little more than 2 hours, about 10 minutes of the evidence was devoted to the fixing of the WM/Reuters foreign exchange benchmark. (Clicking on the link above, the relevant extract can be located in the transcript from about question 94 onwards.)

Those Members of the Committee asking questions of Mr Wheatley referred to the foreign exchange market as being “extremely important” to the UK, and outlined their concerns that the consequences of manipulation of that market could be very far reaching, as foreign exchange rates have an impact on many different areas of the economy beyond financial services.

Mr Wheatley was asked whether the manner in which foreign exchange rates are fixed can be trusted. In responding, he said that both the FCA and other regulators were surprised that the allegations had arisen in the fist place, because the WM/Reuters fix relies on actual trading data, unlike LIBOR rates which were fixed on the basis of hypothetical borrowing rates. He also said regulators were surprised that, given its size and liquidity, the foreign exchange market could be exposed to manipulation. He was forced to concede that the manner in which FX rates are currently fixed cannot be trusted.

Clearly, then, possible manipulation of a market as large as that for foreign exchange is likely to attract interest from regulators in several jurisdictions.

As is apparent from the LIBOR investigation, one of the biggest concerns for many of the institutions and people alleged to be involved is this multi-jurisdictional nature of the enquiries from regulators. A number of firms have been faced with investigations into their practices by both the US and the UK regulators. This is very expensive, not only for the regulators, but also for those under investigation. It may also smack of unfairness, as it appears that regulators have a number of bites of the cherry.

At their recent meeting, the members of the Committee seemed to be concerned about possible duplication of work by the various worldwide regulators investigating these issues. In the current, difficult, climate for Government spending, the members of the Committee were clearly concerned about who would bear the cost. Their questions sought to identify whether the necessary resources were being allocated fairly by those countries whose regulators were interested in getting to the bottom of what may have taken place.

Mr Wheatley took some time to answer the question, and the matter had to be probed twice. He summarised his position as follows: that whilst there might be some informal agreements of co-operation between regulators as to who takes the lead in investigating regulatory breaches, with these informal agreements being made in line with obligations under the International Organization of Securities Commissions memorandum, there is no formal or informal agreement in place about whether a regulator will or will not pursue criminal enquiries, nor can there be any such arrangement in place.

Those who ultimately face a criminal investigation, then, cannot rule out the possibility that they may have to answer questions in more than one jurisdiction and, indeed, may face allegations in more than one jurisdiction.

Most interestingly, Mr Wheatley was also asked whether any other benchmarks are currently being investigated by the FCA. He confirmed that there are, but refused to elaborate. He told the Committee that until such time as the FCA had concluded that there was a case to answer in respect of the other benchmarks currently being analysed, he did not want to identify them for fear of prejudice caused by press reporting. He went on to say that the FCA had revealed the foreign exchange investigation before coming to any definitive conclusions, because it had already been the subject of significant press speculation, and the FCA had taken the view that an announcement of their probe would restore confidence in the market.

Readers may agree that the revelation this week of the meeting between the Bank of England and senior foreign exchange dealers in April 2012, at which it was alleged the Bank was told that foreign exchange dealers were sharing information about their clients’ orders yet did nothing to stop the activity, has now further undermined public confidence in the banking sector. The FCA will surely now feel pressure to conclude its enquiry as soon as it practicably can. However, despite this serious development, Mr Wheatley does not envisage that being during 2014.

It seems this story will run for quite a while yet.

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