FBI Steps In: United States Launches Criminal Investigation On FX Manipulation

Regulatory authorities worldwide have demonstrated their commitment to ensuring that the FX industry is fully under their watch, with the United States having led the way by introducing a complete overhaul of the entire financial markets' structure in the form of the Dodd-Frank Act, and now involving the Federal Bureau of Investigation (FBI) to conduct criminal investigative tasks.

The Dodd-Frank Act has stipulated that the entire methodology by which FX can be traded should be investigated, resulting in each aspect of the trade process, from the custody of client funds, to the reporting process after a trade has taken place being subject to entirely new procedures.

Despite these exhaustive measures, malpractice among institutions can still take place. At the end of last week, a criminal inquiry into alleged FX market benchmark manipulation was launched by the FBI in the United States, further bolstering the strength of the Commodity Futures Trading Commission (CFTC CFTC The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commiss The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commiss Read this Term), the regulatory authority charged with the ability to apply civil proceedings against firms which engage in this practice.

This particular investigation by the FBI was brought about by an announcement made by the British financial markets' regulator, the Financial Conduct Authority (FCA) Financial Conduct Authority (FCA) The Financial Conduct Authority (FCA) is the largest financial regulator for all financial markets in the United Kingdom (UK).The UK regulator is responsible for the conduct of firms authorized under the Financial Services and Markets Act 2000. Moreover, the FCA is also responsible for the regulation of behavior in retail and wholesale financial markets, supervision of the trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. Its rol The Financial Conduct Authority (FCA) is the largest financial regulator for all financial markets in the United Kingdom (UK).The UK regulator is responsible for the conduct of firms authorized under the Financial Services and Markets Act 2000. Moreover, the FCA is also responsible for the regulation of behavior in retail and wholesale financial markets, supervision of the trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. Its rol Read this Term) in June, in which the regulator stated that it was responding to allegations made that dealers within banks collected information via instant messaging, and used client orders to move benchmark currency rates.

LIBOR Rigging A Criminal Offence?

Manipulation of the London Interbank Offered Rate (LIBOR) has been one of the benchmarks which regulatory authorities have taken an extremely dim view of within the FX market, often issuing very large fiscal penalties against firms such as ICAP’s recent $65 million penalty for interfering with the Yen LIBOR rate.

Swiss regulatory authority FINMA, announced just last week that it is working in close collaboration with foreign regulators as multiple banks from several countries may be implicated, and thus is widening the scope of this development across borders.

Earlier in the year, the Royal Bank of Scotland’s Japanese subsidiary, RBS Securities Japan, was handed a $325 million penalty for Yen and Swiss Franc LIBOR manipulation. Whilst these penalties amount to somewhat stratospheric sum totals, and the investigations are resource-hungry and extensive, they often only amount to monetary penalties which are settled without the implications of criminal charges.

As far as the criteria is concerned, Reuters' rates are published hourly for 160 currencies, and half-hourly for the 21 most traded. They are the median of all trades in a minute-long period starting 30 seconds before the beginning of each half-hour. Rates for less-widely traded currencies are based on quotes during a two-minute window.

The FBI has in the past assisted with inquiries into LIBOR manipulation, a particular example being May 2011’s investigation of British financial market behavior, in which the Daily Telegraph reported that four large banking institutions were assisting the CFTC and the FBI with the investigations.

Should the FBI gain legislature over transgressors of FX LIBOR manipulation, the consequences of malpractice could result in more than just a minus entry of a few million dollars on the corporate balance sheet.