A question of integrity: forex scandal leaves Bank fighting to save reputation

Mark Carney, the Bank of England’s Governor, will face one the sternest tests of his tenure today. He and Paul Fisher, the Bank’s executive director of markets, will appear before MPs to answer explosive allegations that the institution turned a blind eye to the manipulation of foreign exchange markets.

Last week, the Bank was dragged deep into the latest City scandal after it suspended one individual amid suggestions that its “rigorous internal control processes” had not been followed.

In a bid for full transparency, Mr Carney published 180 pages of private documents and placed an internal investigation in the hands of the oversight committee of the Bank’s Court of Directors, who are being supported by Travers Smith, the law firm. Yet the documents have raised new questions and left many more unanswered.

When did the Bank first hear that the forex market may have been manipulated? What was done about it?

The cache of documents show that the chief dealers’ sub-group of the Foreign Exchange Joint Standing Committee had discussed possible manipulation on at least three occasions between 2005 and 2013.

City traders claim it was an open secret that confidential customer information was routinely shared in online chatroom clubs with names like “The Cartel” and “The Mafia”. As the Bank had two sets of eyes on the market — the JSC and its Market Intelligence group — it seems inconceivable that it heard nothing about forex collusion.

Either it heard that the market was being rigged and ignored the warnings, or its intelligence gathering failed. Alternatively, it investigated and found nothing remiss. All are difficult options.

Does the Bank have any information to corroborate or dispute the allegation that it turned a blind eye to admissions by traders that they were sharing customer orders?

The main allegation is that on April 23, 2012, the JSC chief dealers’ sub-group was told directly that customer information was being shared. Anonymous traders at the meeting have claimed that the activity was effectively condoned. However, Andrew Bailey, a deputy governor, said last month that the Bank had seen no evidence to support the allegations, first made in a Bloomberg report.

The Bank’s supporters say that the traders’ claims are part of a cut-throat defence as they face prosecution, and even jail, for rigging the market. At least 24 traders have been suspended as part of investigations, four of whom were on the JSC sub-group.

Why did Andrew Bailey claim last month that the Bank had “no evidence to substantiate the claim that Bank officials . . . were informed of price manipulation”, when the minutes showed otherwise?

The Bank launched an internal review into the allegations last October, but Mr Bailey’s comment raises questions over the depth of the investigation. Either he misled Parliament with his answer or the Bank has only recently uncovered the minutes of the JSC meetings. Either way, it makes the self-regulation look worrying weak.

Why was the forex market allowed to operate on an unregulated basis until late last year, even after the Libor scandal and other concerns about market abuse?

Minutes from the 2006 JSC sub-group meetings show that the Bank successfully lobbied for forex to be exempted from harsher regulations. The minutes say that the Bank’s forex committee asked the Treasury to “retain the regulatory status quo for forex”. After it was decided that “forex forwards would remain unregulated instruments”, the JSC sub-group congratulated itself for its “contribution to this debate”.

Are heads expected to roll at a senior level at the Bank?

Three senior individuals are in the frame: Martin Mallett, the chief dealer and chairman of the JSC sub-group, and his direct superiors as head of forex. Since 2009, Michael Cross has been head of the forex division. Before him, when the early warnings of manipulation appear to have been made, Mr Fisher was in charge. Mr Fisher is now a rate-setter.

Will the Bank’s involvement in forex damage its reputation?

Quizzed about the forex claims by the Treasury Committee last month, Mr Bailey said that the Bank’s “reputation and integrity . . . is the most important thing we have”. Even suggestions of corroboration may be devastating.

Questions may also be asked about the Bank’s handling of investigations. American regulators led the charge on the Libor scandal, even though it was a market rate set in London.

Is corruption rife in the City?

After the Libor-rigging scandal and mis-selling of swaps and payment protection insurance, and now claims that the forex market was fixed, we wait to see whether the Governor believes that the City is able to clean up its act.

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