Last month's $4.4 billion in fines against six major banks over foreign exchange price manipulation has spurred FX trading along the same path as trading in equities and fixed income: more transparency and greater use of electronic venues.
It also meant a move toward more 24-hour FX pricing and less use of traditional FX benchmarks.
What's spurred the latest move is the announcement in November that Citibank NA, HSBC Holdings PLC, J.P. Morgan Chase & Co. Inc., Royal Bank of Scotland PLC and UBS AG received a combined $3.4 billion in penalties from U.S., U.K. and Swiss regulators for manipulating foreign exchange benchmark rates to benefit certain traders from 2008 to 2013. Separately, the U.S. Treasury Department's Office of the Comptroller and Currency issued a combined $950 million in penalties against Citibank, J.P. Morgan Chase and Bank of America Corp. for “unsafe and unsound” FX trading practices.
The penalties come as asset owners are paying closer attention to their FX trades, a trend that began after lawsuits in the late 2000s, including those filed by the state of California and the $177.8 billion Florida State Board of Administration against custody banks over FX pricing.
“Foreign exchange is still viewed as somewhat of an ancillary market, but the fines were another wake-up call,” said John Halligan, president of Global Trading Analytics LLC, a Rutherford, N.J.-based trading cost analysis consultant.
Added Steven Glass, president and CEO at Zeno Consulting Group LLC, Washington: “The bank fines have raised the issue onto (asset owners') radar screens. They will reach out to their asset managers and ask what they're doing to get best execution on foreign exchange so that they're not being taken advantage of.” Zeno monitors trading issues for asset owners.
While foreign exchange is getting a closer look from asset owners, William Atwood, executive director of the $14.1 billion Illinois State Board of Investment, Chicago, said even with more transparency, the FX market is still dodgy for asset owners because it's not heavily regulated.
“We were closely monitoring our FX program” since the spate of custodian lawsuits, Mr. Atwood said. “We re-examined our approach to how we monitor foreign exchange trading. We now require our managers to seek best price and execution away from our custodian (State Street). So (FX) trading has improved, but it has kind of created a false sense of security. The market is fairly unregulated. I'm not that entirely comfortable with FX. We keep a close eye on it.”
What made the announcement of the fines so concerning to institutional investors is that banks were shown to have manipulated the World Markets Reuters Closing Spot Rates, the most widely referenced FX benchmark globally, according to the Commodity Futures Trading Commission. The benchmark is used to set the relative values of different currencies, which reflect the rates at which one currency is exchanged for another.