A global regulatory body chaired by Bank of England governor Mark Carney has found that activity in foreign exchange markets is 10 times greater during a crucial trading period that is already the subject of a wide-ranging international investigation.
As the Financial Stability Board published a number of ideas to overhaul the £3.5tn a day currency market, it found that trading activity in the one minute trading period when the benchmark price was set was greater than at other times in the trading day.
One of the FSB's suggestions is to the widen this one minute period used to set the price at the so-called 4pm London fixing price – used to price financial products around the world and which could lead to "collusion or otherwise inappropriate sharing of information".
The FSB found that activity was even greater during this minute than at periods of heightened volatility, such as the release of US data at 1.30pm London time.
The price set at the 4pm fix is based on dealing during a one minute period and is currently being investigated by regulators, including the Financial Conduct Authority, amid allegations that major banks are able to manipulate the price.
The benchmark price at 4pm is important to fund mangers, who use it to value their investments, or big companies and sovereign wealth funds, which want to ensure they trade at the price record at the "fix".
"The result of this activity by their clients leads to a concentration of trading orders being transmitted to dealers, in large part shortly ahead of the fixing time. In order to manage the risk associated with this client order flow, dealers hedge by executing foreign exchange transactions in and around the calculation window, which results in the large spike in trading volume. This creates a market where the dealer is agreeing to execute these orders at an unknown price, which is established subsequently during the fixing calculation window," the FSB said.
"At a minimum, this market structure creates optics of dealers 'trading ahead' of the fix even where the activity is essentially under instruction from clients. Worse, it can create an opportunity and an incentive for dealers to try to influence the exchange rate - allegedly including by collusion or otherwise inappropriate sharing of information - to try to ensure that the market price at the fix generates a rate which ensures a profit from the fix trading," the regulatory body added.
Among its suggestions are that banks do share information with each other and that banks ensure they avoid conflicts of interest when handling orders for clients. Responses are required by August 12.
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