The Chancellor, George Osborne, looks set to make the rigging of foreign exchange markets a criminal offence. This could come as a surprise to many people who may have thought that such an act would already be covered by criminal law.
But maybe just adjusting the way the benchmark is set would be an easier approach as Mark Taylor puts forward below.
Mr Osborne is giving the Chancellor’s annual speech tonight (12th June 2014) at the Mansion House and is expected to say ‘The integrity of the City matters to the economy of Britain’ and that, because the City markets affect peoples’ mortgages, export and holiday exchange rates as well as commodity prices, any abuses must be dealt with.
Commenting on this Warwick Business School Dean, Mark Taylor, who is a former Bank of England and IMF Senior Economist and also an ex-foreign exchange trader said:
“Regulation of the market to make rigging of the reference rate illegal is certainly welcome and will send a signal to the rest of the world that cheating in London’s financial markets will not be tolerated, but my worry is that by itself it won’t be enough.
"The foreign exchange market is massive – around $5 trillion dollars traded per day – and it is by definition global, making it very hard to control and oversee. Also, the incentives to cheat are still massive, even when there is regulation in place.
“If we really want to make sure the foreign exchange reference rate isn’t rigged, we need to remove the incentives to cheat. At the moment the foreign exchange benchmark – the daily London 4pm fix – is made by taking the average of trades 30 seconds before and after 4pm, so if some large trades worth billions of dollars each are sent through it can move the rate a small amount and that could be worth millions of dollars to the traders.
“One solution would be to take away the temptation by taking the average over an hour – so 30 minutes either side of 4pm rather than 30 seconds. It’s a simple, workable solution because it would be a lot harder, if not impossible, to move a market as big as the FX market for an hour. Removing the incentive is much better than regulation because of the global, decentralised nature of the foreign exchange market.”
The view of Patrick Butler, CEO of Prime Wealth Group & CIO of Omada Capital, is that:
"Unless critical implementation controls are executed, the new measures won’t make a real difference".
“Osborne is expected to announce an increase in regulation surrounding the FX market and introduce criminal prosecutions for those acting poorly and manipulating the market in-line with the fair and effective market review. However, crucially what hasn’t been discussed is how these measures and control mechanisms will be implemented and monitored to ensure their success. Broader licensing rules, tighter controls on manipulations such as delaying orders or purposely creating market movement and increasingly stringent reviews are only effective if a sophisticated automated system can be introduced to monitor this huge market. Having said that, the introduction of “continuous linked settlement” clearing a few years ago concentrated flows, and implementing a reporting system with algorithms to detect aberrations is technically feasible. Without it, the new measures won’t make a real difference.” He said.