FX survey 2014: The reign of terror

Investigations into allegations of market fixing in foreign exchange are spreading into the very heart of the business. Those running the world’s biggest FX houses live in fear of what analysis of hundreds of millions of calls and emails will unearth. Do investigators and regulators risk bringing down the axe on a market that has always provided unrivalled liquidity and ultra-tight pricing for clients?

The global head of foreign exchange stares into space, shrugs and musters up a weary smile. He rises from his chair and opens the door to his office, which leads to one of the world’s biggest trading floors.

"Listen," he says. 

There is an eerie calm, almost silence.

It’s by far the most eloquent response to a question Euromoney has put to foreign exchange chiefs at most of the world’s leading traders over the course of several weeks: how are the current investigations into allegations of wrongdoing in the FX market affecting the ability of you and your clients to do business

The answer is right there on what should be a bustlingly busy floor full of traders and salespeople on a Thursday afternoon in April. Fear stalks the FX markets. Bankers talk of traders too scared to pick up the phone when it rings, lest they tell the client something that might now be considered inappropriate by one of the hordes of legal and compliance officers that have dominated the room for several months. 

"We have as many lawyers as traders on the floor these days," the FX chief says, the shrug now more pronounced. 

The irony of this exchange is that it takes place at 4pm in London, a point on the clock that is the root of the crisis in foreign exchange. This is the time of the now infamous fix; the time at which closing prices for a market that trades 24 hours a day globally throughout the week were decided upon. It appears that some unscrupulous traders colluded on terminals such as Bloomberg to manipulate the fix through chat rooms that were cunningly given such secret names as 'the Cartel’: a sign perhaps of the time when FX revelled in its supposed status as an unregulated market; or a reminder that some people, as in any walk of life, bend the rules beyond breaking point or are just plain stupid.

Investigations into the manipulation of the fix continue; the tally of traders that are either suspended pending the results of the inquiry, or have left the business, numbers around 30 and counting. Most leading FX houses expect to be fined heavily at the end of the process.

The problem is, the probe is no longer confined to the fix. Investigators – both from external regulators and the growing army of legal officers within the banks themselves – are poring over millions of emails and phone calls. Within them, bankers admit, will undoubtedly be evidence of other behaviour that regulators might consider inappropriate, and evidence of collusion. 

The terms of the investigation are already spreading beyond trading at the fix and into the entire nature of the sales and trading process within FX. The exchange of information between trading desks of FX banks themselves and with their clients has always been an integral part of the business. Now it is likely to become the cause of billions of dollars in fines and a number of very senior FX bankers leaving the industry under a cloud.

"There have been a couple of times already when I thought I should leave for my own sanity, especially when people on the legal side have caused issues that show they are completely ignorant of how this market works," says another head of foreign exchange. "I owe it to my team to stay in place for now. However I know that, at some point in the future, I am probably going to have to carry the can for the fine that will be given to our firm. The buck will stop here." 

Do you think the current investigations into the FX market will impact banks’ ability to provide the level of service you need?

The reign of terror is in full swing in the world’s busiest financial market, which proudly turns over more than $5 trillion a day. But is the terror justified? And what impact is this current environment having, not just on the banks subject to the investigation, but on the clients that regulators are meant to be there to protect?

The atmosphere of fear is pervasive. FX bankers – usually among the most gregarious and easy to speak to in financial markets – are wary even of talking to a journalist. Some simply will not, hiding behind the spectre of the investigation and their communications teams’ refusal to countenance any discussion that would, inevitably, have to touch on how the current environment is affecting the industry.

Most discussions are strictly off the record. This is reinforced every few minutes of the conversation. So much so that, when at the end of one meeting a PR officer spills a glass of water all over our notebook, we wonder for a split second if this really was an accident. 

But at least we’ve spoken. Increasingly, FX bankers are wary of speaking to clients. "Our sales guys and traders are painfully aware that, every time they communicate with someone outside the bank, they are subject to scrutiny," says a veteran FX banker.