FX probe: Punching a horse

In the UK there’s a guy who is about to be sentenced for punching a police horse during a riot after a football match. Football violence, like misbehaviour in other areas of society (including banking), is becoming a thing of the past due to the almost inescapable recording of events. In the case of the football riot, the man pleaded that he hadn’t meant to punch the horse but he had done so because he had been surprised by it, and that he had been wearing a scarf over his face at the time because of a breathing condition.

I’ll come back to him.

The disappointing news came in on Friday that FINMA, the Swiss regulator, is “currently conducting investigations into several Swiss financial institutions in connection with possible manipulation of foreign exchange markets. FINMA is coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated.”

If there is a case to answer, then no doubt it will have been captured in electronically somewhere. In the last twelve months we have had a wonderful insight into the minds of some bankers whether it has been around honesty: “The strategy here is you pull the Central Bank in, get them to write a big cheque and they have to support their money,” (Anglo Irish Bank telephone recoding); or transparency: “The trick is you must not do this alone...this is between you and me but really don't tell anybody," (Barclays email).

Now, so far there are only suspicions around what might have happened in the FX market, with big Swiss banks – UBS and Credit Suisse – and big currency trading banks – including Citi and Deutsche Bank – reportedly required to provide information on their activities to authorities in the UK and Switzerland, according to various press sources.

Concern around foreign exchange is hardly new; custody banks have until recently been at the wrong end of lawsuits from their big fund management clients who decried what they saw as excessive profiteering from the charges levied on FX transactions.

FX is not really a market, as it consists predominantly of bilateral trading, which is a more profitable model for dealers than exchange-trading assets. The dealer sets the price and is often executing for clients on a single-dealer platform, removing the competitive pressure from other dealers. FX is not alone in this; the bond market is equally opaque.

As an effectively unregulated market, FX is traded on trust; the trust in one’s dealer to offer the best price and that makes the WM/Reuters benchmark a valuable tool in order to provide some transparency for banks’ big corporate and fund manager clients on the prices they are getting.

It is this benchmark that is suspected of having been abused. It is believed possible that some firms have been rigging it, or they have been trading ahead of their customers who were using the benchmark. What we know from previous investigations is that if there is any wrongdoing, someone somewhere will have been recorded talking or writing about it.

Back to the man who was ‘surprised’ by the horse. Thanks to recording of activity these days if you are recorded doing something that looks bad, such as concealing your face while punching a police horse, whatever your reasons, it will be hard to get people onside. Just ask Fabrice Tour.