http://www.businessweek.com/news/2013-12-18/how-secret-currency-traders-club-devised-biggest-market-s-rates
Secret Currency Traders’ Club Devised Biggest Market’s Rates
By Liam Vaughan, Gavin Finch and Bob Ivry December 19, 2013
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It’s 20 minutes before 4 p.m. in London and
currency traders’ screens are blinking red and
green. Some dealers have as many as 50 chat rooms
crowded onto four monitors arrayed in front of
them like shields. Messages from salespeople and
clients appear, get pushed up by new ones and
vanish from view. Orders are barked through squawk boxes.
This is the closing “fix,” the thin slice of the
day when foreign-exchange traders buy and sell
billions of dollars of currency in the largely
unregulated $5.3-trillion-a-day foreign-exchange
market, the biggest in the world by volume,
according to the Bank for International
Settlements. Their trades help set the benchmark
WM/Reuters rates used to value more than $3.6
trillion of index funds held by pension holders,
savers and money managers around the world.
Now regulators from Bern to Washington are
examining evidence first reported by Bloomberg
News in June that a small group of senior traders
at big banks had something else on their screens:
details of each other’s client orders. Sharing
that information may have helped dealers at
firms, including JPMorgan Chase & Co.
(<http://www.businessweek.com/printer/articles/http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=JPM:US>JPM:US),
Citigroup Inc., UBS AG and Barclays Plc,
manipulate prices to maximize their own profits,
according to five people with knowledge of the probes.
“This is a market where there is no law and
people have turned a blind eye,” said former
Senator Ted Kaufman, a Delaware Democrat who
sponsored legislation in 2010 to shrink the
largest U.S. banks. “We’ve been talking about
banks being too big to fail. What’s almost as big
a problem is banks too big to manage.”
‘Bandits’ Club’
At the center of the inquiries are
instant-message groups with names such as “The
Cartel,” “The Bandits’ Club,” “One Team, One
Dream” and “The Mafia,” in which dealers
exchanged information on client orders and agreed
how to trade at the fix, according to the people
with knowledge of the investigations who asked
not to be identified because the matter is
pending. Some traders took part in multiple chat rooms, one of them said.
The allegations of collusion undermine one of
society’s fundamental principles -- how money is
valued. The possibility that a handful of traders
clustered in a closed electronic network could
skew the worth of global currencies for their own
gain without detection points to a lack of
oversight by employers and regulators. Since
funds buy and sell billions of dollars of
currency each month at the 4 p.m. WM/Reuters
rates, which are determined by calculating the
median of all trades during a 60-second period,
that means less money in the pension and savings
accounts of investors around the world.
‘Collusive Practices’
At stake is the integrity of a market that
affects the daily valuations of private and
public money alike, from the $261 billion
Sacramento-based California Public Employees’
Retirement System to the $237 billion Scottish
Widows Investment Partnership in Edinburgh, from
the $4.1 trillion BlackRock Inc.
(<http://www.businessweek.com/printer/articles/http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=BLK:US>BLK:US)
in Manhattan, the world’s largest asset manager,
to the $1.2 trillion Tokyo-based Government
Pension Investment Fund, the biggest pension.
“This is a market that is far more amenable to
collusive practices than it is to competitive
practices,” said Andre Spicer, a professor at the
Cass Business School in London, who is researching the behavior of traders.
‘Big Profits’
Unlike sales of stocks and bonds, which are
regulated by government agencies, spot foreign
exchange -- the buying and selling for immediate
delivery as opposed to some future date -- isn’t
considered an investment product and isn’t subject to specific rules.
While firms are required by the Dodd-Frank Act in
the U.S. to report trading in foreign-exchange
swaps and forwards, spot dealing is exempt. The
U.S. Treasury exempted foreign-exchange swaps and
forwards from Dodd-Frank’s requirement to back up
trades with a clearinghouse. In the European
Union, banks will have to report foreign-exchange
derivatives transactions under the European Market Infrastructure Regulation.
A lack of regulation has left the
foreign-exchange market vulnerable to abuse, said
Rosa Abrantes-Metz, a professor at New York
University’s Stern School of Business in Manhattan.
“If nobody is monitoring these benchmarks, and
since the gains from moving the benchmark are
possibly very large, it is very tempting to
engage in such a behavior,” said Abrantes-Metz,
whose 2008 paper “Libor Manipulation” helped
spark a global probe of interbank borrowing
rates. “Even a little bit of difference in price can add up to big profits.”
Culture ‘Wrong’
The currency investigations are taking place as
authorities grapple with a widening list of
scandals involving the manipulation by banks of
benchmark financial rates, including the London
interbank offered rate, or Libor, and ISDAfix,
used to determine the value of interest-rate
derivatives. The U.K. regulator also is reviewing
how prices are set in the $20 trillion gold
market, according to a person with knowledge of the matter.
“Some of these problems developed over many years
without anybody speaking up,” said Andrew Tyrie,
chairman of Britain’s Commission on Banking
Standards and Parliament’s Treasury Select
Committee. “This is remarkable. It suggests
something very wrong with the culture at these institutions.”
The story published by Bloomberg News in June,
based on interviews with current and former
traders, triggered internal probes as banks began
reviewing millions of instant messages, e-mails
and transcripts of phone calls to see whether
employees attempted to rig rates. The U.K.’s
Financial Conduct Authority, the European Union,
the Swiss Competition Commission and the U.S.
Department of Justice are all now investigating.
Deutsche Bank
In addition to seeking evidence of collusion, the
FCA is looking into whether traders cut deals for
personal profit before completing customers’
orders, according to a person with knowledge of
the probe. Bloomberg News reported in November,
based on the accounts of two people who witnessed
the transactions, that some dealers placed side
bets for personal accounts or through friends in exchange for cash payments.
At least 12 currency traders have been suspended
or put on leave by banks as a result of internal
probes, and 11 firms have said they were
contacted by authorities. Government-controlled
Royal Bank of Scotland Group Plc turned over
transcripts of instant messages. Deutsche Bank
AG, Germany’s largest lender, said it’s
cooperating with regulators and Zurich-based UBS,
the world’s fourth-biggest currency dealer, said
it’s taking unspecified disciplinary measures against employees.
Justice Department
Britain’s FCA, which has about 60 people working
on benchmark investigations, has asked
foreign-exchange traders to come in for voluntary
interviews, according to the people with
knowledge of the probe. The individuals are among
at least 40 traders whose communications are
being reviewed, one of them said. The
conversations being examined date back to 2004,
another said. Chris Hamilton, a spokesman for the FCA, declined to comment.
The Justice Department has issued subpoenas to
banks, according to three people with knowledge
of the probe who asked not to be identified
because the investigation is confidential.
“The criminal and antitrust divisions have an
active, ongoing investigation into possible
manipulation of foreign-exchange rates,” Peter
Carr, a department spokesman, said in an e-mail.
He declined to name any specific institutions.
EU competition commissioner Joaquin Almunia said
in October the Brussels regulator’s probe into
currency markets was at a “very preliminary”
stage. Several banks have come forward with
information on possible rigging in the hope of
winning leniency, Almunia’s spokesman Antoine Colombani said in November.
‘The Cartel’
None of the traders or the banks they work for has been accused of wrongdoing.
The investigations have had repercussions across
the industry. UBS, RBS, Citigroup, Deutsche Bank,
JPMorgan and Lloyds Banking Group Plc are banning
traders from using multibank chat rooms, people
at the firms said. Investors are breaking their
orders into smaller units and using more banks to
reduce the opportunity for front-running, one of
Europe’s largest money managers said.
One focus of the investigation is the
relationship of three senior dealers who
participated in “The Cartel” -- JPMorgan’s
Richard Usher, Citigroup’s Rohan Ramchandani and
Matt Gardiner, who worked at Barclays and UBS --
according to the people with knowledge of the
probe. Their banks controlled more than 40
percent of the world’s currency trading last
year, according to a May survey by Euromoney Institutional Investor Plc.
Entry into the chat room was coveted by
nonmembers interviewed by Bloomberg News, who
said they saw it as a golden ticket because of the influence it exerted.
Minimizing Losses
Regulators are examining whether discussions
among the traders amounted to collusion -- if,
with a few keystrokes, they were able to push
around rates to boost bank profits and their own
bonuses. Traders on the chat deny that, saying
they were merely matching buyers and sellers
ahead of the fix. That way they could minimize
losses by avoiding trades at a time of day when
prices typically fluctuate the most, they said.
The men communicated via Instant Bloomberg, a
messaging system available on terminals that
Bloomberg LP, the parent of Bloomberg News,
leases to financial firms, people with knowledge of the conversations said.
The traders used jargon, cracked jokes and
exchanged information in the chat rooms as if
they didn’t imagine anyone outside their circle
would read what they wrote, according to two
people who have seen transcripts of the discussions.
Usher, Ramchandani and Gardiner, along with at
least two other dealers over the years, would
discuss their customers’ trades and agree on
exactly when they planned to execute them to
maximize their chances of moving the 4 p.m. fix,
two of the people said. When exchange rates moved
their way, they would send written slaps on the back for a job well done.
Bollinger Champagne
The conversations echo those uncovered by
regulators about Libor, in which bankers promised
bottles of Bollinger champagne or cash to
counterparts at firms willing to help them rig
the benchmark interest rates used to price $300
trillion of contracts from student loans to
mortgages. More than six banks have been fined
about $6 billion since June 2012, and regulators
are investigating traders at half a dozen more firms.
The currency discussions were even more
calculating, one of the people who reviewed the transcripts said.
Usher was the moderator of “The Cartel,” people
with knowledge of the matter said. He worked at
RBS and represented the Edinburgh-based bank when
he accepted a 2004 award from the publication FX
Week. When he quit RBS in 2010, the chat room
died, the people said. He revived the group with
the same participants when he joined JPMorgan the
same year as chief currency dealer in London.
Standard Chartered
Ramchandani is head of European spot trading at
New York-based Citigroup. Born in India, and said
by people who know him to be studious and polite,
he joined the bank’s trading desk after
graduating from the University of Pennsylvania
with a degree in economics, according to a
spokesman for the school and a recruiter who has
a copy of his resume. He relocated to London from New York in 2004.
Both Ramchandani and Usher were part of the Bank
of England’s 27-member London Foreign Exchange
Joint Standing Committee subgroup of chief
dealers as of the end of 2012, according to the
central bank’s bulletin. The group met three
times last year to discuss matters including
regulatory developments, the bulletin reported.
Gardiner joined Standard Chartered Plc in London
in September as assistant chief currency dealer.
He previously worked at UBS in Zurich and was
co-chief dealer with Chris Ashton at Barclays in London.
FCA Inquiry
Usher, Ramchandani and Gardiner were put on leave
by their employers after the FCA opened its
inquiry, according to people with knowledge of
the matter. Ashton, now global head of spot
trading at Barclays, was suspended along with
five other spot traders at the bank in London and New York.
Ashton and Ramchandani declined to comment when
contacted by telephone. Gardiner didn’t return
messages left on his mobile phone. JPMorgan
declined to provide contact details for Usher,
who couldn’t be located through Internet searches
or directory assistance. The bank also declined
to comment about the probes, as did spokesmen for
RBS, Standard Chartered, Citigroup, Barclays and
UBS. Deutsche Bank said in an e-mail that it’s
cooperating with investigations and “will take
disciplinary action with regards to individuals if merited.”
London is the world’s biggest hub for currency
trading, accounting for about 41 percent of all
transactions, compared with 19 percent for New
York and 6 percent for Singapore, according to a
Bank for International Settlements survey
published in September. About $5.3 trillion
changes hands every day, BIS data show, as
companies convert earnings into dollars, euros or
yen and managers overseeing pensions and savings
buy and sell shares around the world.
Essex Countryside
Spot currency trading is conducted in a small and
close-knit community. Many of the more than a
dozen traders and brokers interviewed for this
story live near each other in villages dotting
the Essex countryside, a short train ride from
London’s financial district, and stay in touch
over dinner, on weekend excursions or with
regular rounds of golf at local clubs.
Spot traders simply deal with buy and sell orders
and don’t need the complex math skills their
counterparts on derivatives desks use to
extrapolate prices. Developing and maintaining
relationships are more important, the traders say.
“The foreign-exchange market has a very strong
culture, in which practitioners feel more
attached to each other than they do their banks,”
said Spicer, the Cass School of Business
professor. “It is also dominated by an extremely
small group of individuals, often with strong
social ties formed by working with each other at some point in the past.”
Golf Club
On one excursion to a private golf club in the
so-called stockbroker belt beyond London’s M25
motorway, a dozen currency dealers from the
biggest banks and several day traders, who bet on
currency moves for their personal accounts,
drained beers in a bar after a warm September day
on the fairway. One of the day traders handed a
white envelope stuffed with cash to a bank dealer
in recognition of the information he had
received, according to a person who witnessed the exchange.
Such transactions were common and also took place
in tavern parking lots in Essex, the person said.
Personal relationships often determine how well
currency traders treat their customers, said a
hedge-fund manager who asked not to be
identified. That’s because there’s no exchange
where trades take place and no legal requirement
that traders ensure customers receive the best deals available, he said.
Eaton Vance
Hedge-fund managers get the best prices because
they trade frequently and are the most
sophisticated, according to a former U.S.
currency dealer. Next in line are institutional
funds -- insurance companies and pension plans
that get less-beneficial prices. At the bottom
are firms from automakers to smartphone
manufacturers that need to swap currencies to
purchase materials abroad and repatriate
earnings. Traders at banks take advantage of them
because they know the least about the market, he said.
Eaton Vance Corp., a mutual-fund company that
manages $281 billion, uses the WM/Reuters rate to
value its portfolio, so the credibility of the
rate as a result of rigging allegations is
potentially worrisome and the firm is continuing
to monitor its reliability, said Michael O’Brien, director of global trading.
While the Boston-based company has its own
trading desk to make sure investors get the best
prices, it uses bank traders for certain
currencies, O’Brien said, adding that most customers have little choice.
Market Share
“Banks are market-makers in foreign exchange, and
to a large degree you can’t avoid them,” O’Brien
said. “People have to trust the pricing.”
Four banks control more than half the
foreign-exchange market, according to Euromoney’s
survey. Deutsche Bank, based in Frankfurt, was
No. 1, with a 15.2 percent share, followed by
Citigroup with 14.9 percent, Barclays with 10.2
percent and UBS, Switzerland’s biggest lender, with 10.1 percent.
The WM/Reuters rates for 160 currencies, used as
a benchmark by companies and investors around the
world, are determined by trades executed in a
minute-long period called “the fix,” starting 30
seconds before 4 p.m. in London.
The data is collected and distributed by World
Markets Co., a unit of Boston-based State Street
Corp., and Thomson Reuters Corp. Bloomberg LP
competes with Thomson Reuters in providing news
and information, as well as currency-trading
systems and pricing data. Bloomberg LP also
distributes the WM/Reuters rates on Bloomberg terminals.
State Street
Thomson Reuters said it “would lend its expertise
to support any authorities’ investigation into
alleged disruptive behavior on benchmarks.” The
company doesn’t administer the WM/Reuters rates,
it added in an e-mailed statement.
“The WM/Reuters benchmark service is committed to
reliability and robust operational standards,”
State Street said in an e-mail. “WM continually
reviews recommended methodology and policies in
order to ensure that industry best practices are considered.”
Aside from trading after economic events such as
interest-rate cuts, 4 p.m. is the busiest time
for currency dealers as customers place orders to
be transacted at the fix price.
Things are even more hectic on the last working
day of the month, when tracker funds buy and sell
currencies with their banks. The funds say they
have to trade at the fix because the global
indexes they track, such as the MSCI World Index,
are calculated once a day using the 4 p.m. WM/Reuters rates.
The frenzy begins an hour earlier on trading
floors as dealers jockey for advantage. Bids and
offers are exchanged. Slang is common. Mio means million. A yard is a billion.
Loss-Leader
Because traders promise clients they’ll get the
fix price, it leaves banks open to losses if the
market moves against them, one London-based
dealer said. He described trading at the fix as a
loss-leader that helped his firm win client business.
To make money, traders interviewed by Bloomberg
News said they would share information with
counterparts at other firms and trade ahead of
large client orders. Most tracker funds place
their orders as much as an hour before the fix,
giving dealers a glimpse of possible future price
movements, which they can use to take positions.
Traders on instant-message groups increased their
chances of predicting market moves by pooling
details of their order books and agreeing to
align positions at the fix, according to three
people with knowledge of the practice.
Dealers can buy or sell the bulk of their client
orders during the 60-second window to exert the
most pressure on the published rate, a practice
known as banging the close. Because the benchmark
is based on the median value of transactions
during the period, breaking up orders into a
number of smaller trades could have a greater
impact than executing one big deal.
Market Movements
Some dealers said the tactic is legitimate and
necessary for banks to protect themselves from
losses. Traders who agree to buy or sell at the
close need to push through the bulk of their
orders during the window to minimize the risk of
losses from market movements, the traders said.
One large transaction can be enough to move the
market. A former bank trader said that if he
received an order from a customer at 3:30 p.m. to
sell 1 billion euros ($1.37 billion) in exchange
for Swiss francs at the 4 p.m. fix, he would have
two objectives: to sell his bank’s own euros at
the highest price and also to move the rate lower
so that at 4 p.m. he could buy the currency from his client at a lower price.
While foreign exchange is unregulated, dealers
are prohibited by market-abuse laws from trading
on inside information and sharing confidential
data about client orders with third parties. In
recent years, banks have tightened rules on
employees’ trading for their own accounts. Many
require staff to hold investments for at least 30
days and obtain written clearance from compliance
officials for personal dealings.
Currency Futures
The U.S. Commodity Futures Trading Commission,
which has no oversight of the spot market, does
regulate foreign-exchange futures, contracts that
allow companies or investors to speculate on or
hedge against the price movements of currencies.
Some of those contracts, such as cash-settled
forwards traded on the Chicago Mercantile
Exchange, use WM/Reuters rates to determine who
owes what at settlement. The agency has been
reviewing potential violations of the law,
according to a person with knowledge of the matter.
Its chairman, Gary Gensler, who declined to
comment about any investigation the agency might
be conducting, said the CFTC is understaffed,
with 670 employees, when more than 1,000 would better fulfill its mission.
“We need to make sure reference rates are not
based on a closing price that’s manipulated,”
Gensler said in an interview. “The CFTC does not have enough people, period.”
U.K. Rules
In the U.K., the government is introducing laws
designed to curtail market manipulation and
punish traders found guilty of wrongdoing. In
April, it became a criminal offense for anyone to
knowingly make false or misleading statements
relating to the setting of benchmarks. Other
proposals include deferring bonuses for as long
as 10 years and guaranteeing rights for
whistle-blowers. They stop short of recommending
specific regulations of the spot foreign-exchange market.
Even if regulators were watching the currency
market, there would be a question of what they’d
see and whether they’d be able to identify
wrongdoing, said Felix Shipkevich of Shipkevich
PLLC, a derivatives law firm in New York.
“Who has the expertise to determine if there’s
any potential unlawful activity going on?” he
said. “There are very few people who understand the over-the-counter market.”
To contact the reporters on this story: Liam
Vaughan in London at lvaugh...@bloomberg.net;
Gavin Finch in London at gfi...@bloomberg.net;
Bob Ivry in New York at bi...@bloomberg.net
To contact the editor responsible for this story:
Edward Evans at eeva...@bloomberg.net
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Please consider seriously the reason why these elite institutions are not discussed in the mainstream press despite the immense financial and political power they wield?
There are sick and evil occultists running the Western World. They are power mad lunatics like something from a kids cartoon with their fingers on the nuclear button! Armageddon is closer than you thought. Only God can save our souls from their clutches, at least that's my considered opinion - Tony
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