FINMA and WEKO, the Swiss competition regulator, have launched twin enquiries on the possible rigging of forex rates
The Swiss financial services regulator FINMA has announced it is investigating the possible manipulations of forex rates by a number of prominent international banking institutions. Though FINMA revealed in a statement that it is “coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated,” it refused to name the institutions under scrutiny or to divulge any more details about the investigations.
An additional investigation by WEKO, Switzerland’s competition regulator, has also been announced. “We are currently investigating the possible formation of cartels in the forex exchange rates,” Olivier Schaller told Forex Report. “We can also confirm we are now collaborating with FINMA in this matter.” No further details were forthcoming, but Schaller insisted the investigation will be robust, and may take some time before results are reported.
Although FINMA has refused to name the banks under investigation, the FT has claimed that UBS is among them, citing sources close to the investigation. FINMA has neither confirmed or denied this, though.
Because FINMA has been economical with details of the investigation, its aims are still unclear. There are over 353 banks licensed by the regulator, as well as 319 cooperative banks and 98 authorised representative offices of foreign banks, making the potential scope for investigation quite large. There has been some speculation that the FINMA investigation is related to figures released in August that appeared to point to the possible rigging of forex rates in June, though the regulator has refused to be drawn on this.
Despite the lack of information, there are a number of clear parallels with the LIBOR rate fixing scandal of 2012, which has seen a number of major international financial institutions fined to the tune of billions of dollars for attempting to manipulate rates. Since it was revealed that banks were setting interbank lending rates for their own gain, the banking industry has been under increased scrutiny.
A working paper, released by the Bank for International Settlements suggests that players in the forex market have access to the information necessary to set rates at more favourable levels. “Observing customer order flows in a dark market is highly valuable from the dealer’s perspective. Our findings suggest that the forex market is populated by quite heterogeneous market participants and that we gain valuable economic insights from observing their transactions and learning about their different predictive ability, trading motives, trading styles and risk exposures.
The paper added that “dealers have a strong incentive to gain large market shares (besides other reasons such as economies of scale in the provision of trading infrastructure, for example) and to set up trading in a way that reveals end-users’ identities. These findings about strong information asymmetries and incentives should be useful to inform policy discussions on the appropriate framework for OTC markets.”
This appears to support the idea that due to a variety of sources that originate prices, there is a possible discrepancy between true market midpoints because of time lapses, leading to a gap that could allow for the arbitrary manipulation of rates in favour of one party.
When contacted, FINMA refused to comment on the investigation. And though the Swiss Bankers Association is the leading professional organisation of the Swiss financial sector, it has insisted it is not involved in the situation and cannot comment on behalf of its members.