Risk Management

Banks Clamping Down on Unethical Currency Traders

After several probes revealed FX dealers are leaking customer information for profit, some top banks are reacting by introducing restrictive measures.
Iris DorbianSeptember 16, 2014
Banks Clamping Down on Unethical Currency Traders

To prevent currency traders from exploiting clients for profit, several top banks are imposing a series of restrictions. Sources tell Bloomberg that these measures include capping how much bank employees can charge clients for exchanging currencies, limiting access to information about customer orders, forbidding the use of online chat rooms and permitting trading only on electronic platforms.

currency tradeIn a $5.3 trillion-a-day market that the news outlet describes as “largely unregulated,” some experts regard these measures as long overdue.

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“This is finally bringing the [foreign exchange] market into the 21st century,” Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics, tells Bloomberg. “What we’re seeing is a modernization of processes that probably should have been brought in 15 or 20 years ago.”

What likely prompted the banks, which include Barclays and Deutsche Bank, to take action against unscrupulous currency traders were the ongoing government investigations that revealed how dealers leak private customer information to “counterparts at other firms and collude to rig currency benchmarks used by money managers,” according to Bloomberg.

Among the other banks that are introducing preemptive measures are Royal Bank of Scotland, Goldman Sachs and UBS. Bloomberg notes these particular banks “account for 43% of foreign-exchange trading.”

U.S. prosectors could file charges against traders as early as next month. One analyst tells the news outlet that the scandal could cost the banks as much as $15 billion in fines.

Regulators are alleging that traders engaged in unethical practices by sharing data about customer orders with traders at other firms using instant-message groups. Further, regulators are also investigating “whether dealers sought to move the WM/Reuters rates in their favor by pushing through trades before and during the 60-second windows when the benchmarks are set,” according to Bloomberg.

Sources tell Bloomberg that before the current probes, customer orders in most banks were “visible” to employees at trading desks. Also, it was standard for traders and salespeople to “routinely pass on information about large deals to their best clients in a bid to secure future business.” Further, very often clients usually asked for such tips, the sources added.

“The information would allow customers, including hedge funds, to place their own bets in the knowledge that the market probably would move when a currency reached a certain level,” writes Bloomberg. The sources noted that “some clients would threaten to withhold business from a lender that didn’t comply.”

Source: Bloomberg Biggest Banks Said to Overhaul FX Trading After Scandals

Image: Flickr user Nick Hubbard, CC BY 2.0