Lord Grabiner, the barrister who has led an investigation into the foreign exchange rate rigging scandal, said the $5.3tn-a-day forex market needs to be regulated – but not too much, or the City could lose business to Frankfurt or New York.
Appointed by the Bank of England last March to review allegations that its staff knew about foreign exchange rate manipulation, Grabiner told MPs on the Treasury Committee: “One of the curiosities of this marketplace is that it was not regulated.”
The Financial Conduct Authority fined five leading banks including the bailed-out Royal Bank of Scotland a total of £1.1bn in November for rigging the foreign currency markets.
Penalties from the US authorities brought the total tally to a record £2.6bn. The investigations centred on traders’ use of chat rooms to coordinate currency rates in the minutes leading up to a daily 4pm “fix”.
Grabiner told the parliamentary committee: “My own view is that you can’t leave a market of this size in an unregulated form. You really do need to have a careful look at it, but you must not undermine the valuable marketplace you have created because if you make it too expensive or too complicated it’ll end up in Frankfurt or New York or somewhere else and then UK Plc loses out.”
Minouche Shafik, the Bank’s deputy governor for markets and banking, is looking at how to stamp out market manipulation as part of a sweeping review into the global markets for fixed income, foreign exchange and commodities, which together generated $117bn (£77bn) of revenues for the big investment banks in 2013. She is due to report in June.
Grabiner also noted that until the forex rigging scandal, dealers were happy to pass market information on to Bank officials because they “knew it was going to be used for the national interest,” even though they were aware that the Bank was not the regulator.
“Banks will be very wary about what they say and what they don’t say to each other and to the Bank of England,” Grabiner said, noting that banks tightened up their internal regulatory arrangements following the hefty fines and will no longer permit traders to have these conversations with the Bank. “One of the things that will dry up will be open communication on the Bloomberg chat room.”
A Treasury committee member said this meant the UK financial authorities could be deprived of vital information in a financial crisis.
Grabiner’s report found no evidence that any Bank official was involved in unlawful or improper behaviour. However, he concluded that the Bank’s chief currency dealer, Martin Mallett, had committed an “error of judgment” by not telling superiors about his concerns that the foreign exchange markets could involve collusive behaviour.
Mallett was fired for serious misconduct the day before Grabiner’s review was published, but, according to the Bank, for reasons related to its own internal review. The barrister believes that Mallett “did not act in bad faith”. He stressed the need for “continuous professional training” to prevent this happening again, noting that there is constant training in the medical, legal and teaching professions.
Shafik has said market manipulation was not just a case of a “few bad apples” but of “deep-rooted problems”, and said the best deterrent to rogue traders is the threat of jail, rather than fines.
guardian.co.uk © Guardian News and Media Limited 2010