Suspicions that the vast global currency markets may have been rigged by major banks and traders has sparked the City regulator to launch a formal investigation into the £3tn a day market.
Royal Bank of Scotland is among the major banks to have been contacted by the Financial Conduct Authority about the investigation, in a blow to the new boss of the bailed-out bank Ross McEwan, who took the helm at the start of the month.
The investigation is likely to be on a similar scale to the far-reaching inquiry into interest rate markets that found that traders at a number of major firms had been manipulating the Libor benchmark.
After gathering information over the last six months, the FCA has now joined with a number of regulators around the world to investigate the dealing activities of banks and their traders in a market that is regarded as the most actively traded anywhere in the world. More than 40% of global forex trading is conducted in London.
The FCA warned that the investigation could take months to conclude, but if misconduct has taken place, firms and traders could face fines and bans. The watchdog fined Barclays, Royal Bank of Scotland, UBS and money broker Icap for Libor rigging.
A number of regulators have already launched formal investigations into the foreign exchange markets, including authorities in the US and the markets regulator in Switzerland. They are focusing particularly on the way that a benchmark used to price a wide range of currencies may have been manipulated.
RBS handed information to the FCA after it scrutinised a series of instant messages sent by a former trader, revealed this week to be Richard Usher, now a top trader at JP Morgan.
There is no suggestion of wrongdoing by Usher – who still works for the Wall Street bank – or any of the firms under investigation. JP Morgan declined to comment.
Traders are said to have sent instant messages to a group known as the Bandits' Club or the Cartel.
RBS said: "We can confirm that we were contacted by the FCA on this matter. Our ongoing enquiry into this matter continues and we are cooperating fully with the FCA and our other regulators."
A spokesman for the FCA said: "We can confirm that we are conducting investigations alongside a number of other agencies both in the UK and abroad into a number of firms relating to trading on the foreign exchange market.
"Our investigations are at an early stage and it will be some time before we conclude whether there has been any misconduct which will lead to enforcement action."
The FCA's announcement came after Hong Kong Monetary Authority admitted it has also begun analysing the foreign exchange markets.
The scrutiny of the foreign exchange markets became apparent after the Bloomberg news agency reported allegations that traders may have been able to influence the way currency benchmarks – used by fund managers to value their investments – were set.
The benchmarks, run by WM/Reuters, are based on prices during a 60-second trading window and it is suggested that traders were putting in client orders ahead of this crucial trading period.
The benchmark rates are published hourly for 160 currencies and half hourly for the 21 biggest currencies, including sterling, which are set by calculating the median price of trades taking place in a 60-second window.
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