Bank of England launches inquiry into forex manipulation claims

Senior currency trader says Bank officials condoned information sharing between traders under investigation

The Bank of England has launched an internal inquiry into allegations that its officials endorsed sharing of information between traders in the foreign exchange market, the central bank's deputy governor told MPs.

The inquiry will examine claims that at a meeting between Bank officials and senior currency traders last April the officials said it was permissible for traders in different banks to share information about clients' positions ahead of the setting of a benchmark rate in the foreign exchange market.

Andrew Bailey told the Treasury select committee: "The governors of the Bank have taken the claims about the meeting with the Bank's officials extremely seriously since we first heard about these allegations. Just so you know, we first heard about them in October.

"The governors immediately initiated a full review into it led by the Bank of England's legal counsel but also supported by external legal counsel and also in close collaboration with the FCA [financial conduct authority]."

Bailey, who is in charge of supervising financial firms, said the Bank had found no evidence that officials had endorsed sharing of information but added: "We do not regard that review as over."

Bloomberg News reported last week that a senior currency trader had informed the financial conduct authority that Bank staff at the April meeting had condoned information sharing. Alleged collusion in setting benchmark rates in the foreign exchange market is at the centre of allegations of market manipulation that could be as big as the Libor scandal.

Bailey said the Bank's inquiry had not yet seen the anonymous trader's notes from the meeting.

Bailey agreed with committee member Pat McFadden that if true the allegations would be "extremely damaging" to the Bank's reputation.

"I agree with you on that. That is why we have set up this investigation and this process," Bailey said. "The governors take the whole question of the reputation and integrity of the central bank extremely seriously. It's the most important thing we have."

The benchmark in question is used to price a wide variety of financial products and is the subject of regulators' attention amid allegations that traders at rival banks were sharing information about their orders from clients to manipulate the price.

A record of the April meeting released by the Bank showed it was chaired by Martin Mallett, its chief currency dealer, and included an entry entitled "extra item". The record says: "Processes around fixes. There was a brief discussion on extra levels of compliance that many bank trading desks were subject to when managing client risks around the main set-piece benchmark fixings."

Martin Wheatley, chief executive of the FCA, which is in charge of stamping out market abuse, told MPs last week that the allegations were "every bit as bad" as those surrounding Libor. Banks have been fined billions of pounds over the Libor scandal.

The meeting was between senior traders at investment banks and a subcommittee of the Bank's foreign exchange standing committee. Bloomberg was told that during a 15-minute conversation about currency benchmarks traders said they used chat rooms to match buyers and sellers ahead of the one-minute period when rates were fixed to avoid trading at a volatile time.

The officials are alleged to have said the practice might benefit markets because it made them more stable.

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Whale of a fine: after blowing $6bn, JP Morgan's trader costs another $920m

Chairman Jamie Dimon sends letter to staff warning of 'more to come' after regulators hit bank with fine

Last spring the City of London was rife with rumours about a trader at the vast JP Morgan investment bank who was making such huge bets on the highly complex – and deeply risky – derivatives markets that he was known as "the London Whale" or "Voldemort". After racking up losses of $6bn (£3.7bn) from his reckless trading, the London Whale blew another hole in the bank on Thursday – landing the Wall Street firm with one of the largest fines ever levied against a single bank.

The Whale was a French-born trader, Bruno Iksil. When stories of his dangerous dealings and the scale of the potential black hole first surfaced, JP Morgan's chairman Jamie Dimon, then Wall Street's most respected banker, shrugged off the losses off with a phrase that will haunt his career: "It's a complete tempest in a teapot," he insisted.

On Thursday, however, the bank agreed to pay some $920m in penalties to US and UK regulators over the "unsafe and unsound practices" that had allowed the bank's losses to balloon to $6.2bn. The near record fine comes as former JP Morgan bankers face criminal action in the US and it has all but sunk Dimon's once promising political career. It is also just one of a series of costly and damaging scandals that are rocking the financial institution.

The US's biggest bank must now hand over $300m to the US office of the comptroller of the currency, $200m to the Federal Reserve, $200m to the securities and exchange commission (SEC) and £137.6m to the UK's City watchdog, the Financial Conduct Authority (FCA). One other US regulator, the commodity futures trading commission, did not sign off on the fine and is still investigating whether the bank is guilty of market manipulation.

JP Morgan admitted wrongdoing as part of the settlement – an unusual step for a financial firm in the crosshairs of multiple legal actions. This week, in a letter to staff, Dimon warned them that, even after the fine, there was "more to come".

The opinions of the regulators were uniformly damning. "JP Morgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses," co-director of the SEC's division of enforcement, George Canellos, said. Senior management "broke a cardinal rule … and deprived its board of critical information," he said. The bank was accused of "unsafe and unsound practices".

The FCA, levying its largest fine to date, said: "The firm's failings were extremely serious. The losses were caused by a high-risk trading strategy, weak management of that trading and an inadequate response to important information which should have notified the firm of the huge risks present."

The Whale's losses are not JP Morgan's only problem. The bank emerged relatively unscathed from the financial crisis, leaving Dimon as the only untarnished king of Wall Street, but the recovery has been less kind. JP Morgan has already faced vast fines for what became known as robosigning – automated procedures which forced thousands of US homeowners out of their houses without following the correct procedures.

On Thursday the bank also agreed to pay $389m to settle allegations that its credit card customers were duped into purchasing services they did not want. At least eight federal agencies are investigating the bank on issues ranging from its mortgage lending practices to its role in fraudster Bernard Madoff's Ponzi scheme. Regulators are reported to be pressing for a $6bn penalty to settle allegations that the bank mis-sold $33bn of bonds backed by sub-prime mortgages to US government-controlled mortgage companies in the run-up to the financial crisis.

In an indictment unsealed in federal court this week Javier Martin-Artajo, who oversaw trading strategy at the bank's London office, and Julien Grout, a trader who worked for him, were charged with securities fraud, conspiracy, filing false books and records, wire fraud and making false filings to the SEC.

Dimon has learned from his "teapot" comment and is now expressing contrition for the bank's debacle. "We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them," he said. This year the bank has hired 3,000 staff to work on "compliance" – or working within the rules.

But reaction to the fine was mixed. John Coffee, professor at Columbia Law School, said: "The victims of this enormous loss were the shareholders of JP Morgan and the remedy is for those shareholders to pay $900m plus in fines. It's not just adding insult to injury, it's adding injury to injury."

No senior bank official has been charged with wrongdoing and Coffee described those indicted so far as "relatively small fish". He added: "Ideally the regulators should fine actual individuals who are responsible. But time and again the SEC settles for large penalties and gives virtual immunity to some officers."

Article Source : http://www.guardian.co.uk

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New European law to clamp down on market price-rigging

Life bans on rogue traders and large company fines as Financial Conduct Authority and Ofgem launch investigations

The European parliament is expected this week to vote through tough new legislation that would allow Brussels – and London – to crack down much harder on rogue traders in financial and energy markets.

The move comes as competition regulators from the European commission widen their inquiry into the oil trading activities of BP and price reporting agency Platts, while a senior Brussels politician urged British financial and energy watchdogs to undertake a deeper investigation into alleged manipulation of the British wholesale gas market.

Arlene McCarthy, vice-chair of the committee on economic and monetary affairs inside the European parliament, said on Sunday she was confident a vote on Wednesday would ensure benchmarks such as the London interbank offered rate (Libor) plus others in the oil and gas sector would be classed as financial instruments, allowing lifetime bans on those trying to rig the markets.

"I am hopeful we will close the loophole in the Libor and energy markets so that regulators in Europe can take appropriate action on abuse. Consumers need to know the prices they pay are fair and I don't want a situation where every time we have a case of manipulation we have to extradite people to the US to face justice [rather than deal with the issue in local courts]," said McCarthy, who is an MEP for the North West of England and chairwoman of the European parliament's committee on internal market and consumer protection.

Under the proposed legislation, Britain and other member states will be able to impose life bans on traders and fine companies 15% of their annual turnover if they are caught abusing the markets. The laws are being brought in after a wave of scandals involving banks manipulating the rates at which they could lend each other money.

But there has also been deep disquiet in Europe about the relatively unregulated British commodity markets after the Guardian published the concerns of a whistleblower, Seth Freedman, from the wholesale gas market about possible manipulation last autumn that triggered an inquiry by energy watchdog Ofgem and the City regulator, the Financial Conduct Authority (FCA).

Fears grew when the competition authorities instigated a series of dawn raids on the offices of BP, Statoil and Platts in May, saying they feared companies may have "colluded in reporting distorted prices to a price reporting agency [PRA] to manipulate the published prices for a number of oil and biofuel products".

Sources in Brussels say the investigators have broadened the scope of their inquiries and have opened up "high level contacts" in the US with the department of justice and the powerful commodity futures trading commission (CFTC).

Alan Duncan, a former oil trader and now international development minister, told the Financial Times last month that the European commission's review was illogical and baseless.

Ofgem and the FCA say they are still in the middle of a preliminary review of the evidence and have yet to decide whether to undertake a full investigation.

"Ofgem continues to look at allegations relating to trading on 28 September 2012, working closely with the Financial Conduct Authority," said an Ofgem spokesman. "We take any allegations of market abuse very seriously. We are also looking at the role of price reporting agencies in relation to the gas and electricity markets and reviewing the information which we have received as part of our call for evidence which closed over the summer."

The FCA declined to comment.

McCarthy said she felt that 10 months on from starting those initial investigations it was time to clarify the situation: "A full investigation is necessary. It is in the public interest because there is not enough transparency and accountability that leaves many people feeling they get ripped off by energy companies.

"If there proves to be nothing there then it will have cleared the air."

Ofgem said it always took seriously its oversight of the energy markets and has received enhanced powers to intervene already after the UK implemented new powers under Brussels-derived wholesale energy market integrity and transparency (Remit) legislation.

A spokesman for the regulator said: "We keep the precise details of our monitoring confidential. But it brings together information on the physical market, trading and other news commentary including any specific reports of suspicious trades we may have received under Remit."

Article Source : http://www.guardian.co.uk

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Bank of England alerts watchdog over market rigging fears

Traders may have tried to rig price paid for government bonds in a quantitative easing auction, Treasury committee hears

The City watchdog is investigating the possibility that traders tried to rig the price that the Bank of England paid for government bonds in a quantitative easing auction, it emerged on Tuesday.

Paul Fisher, the Bank of England's executive director for markets, revealed in testimony to the Treasury select committee that the Bank had refused to buy one particular government bond – known as a gilt – at one of its regular "reverse auctions" in October 2011, because it feared there had been an attempt to manipulate the market.

"The auction went ahead, but we didn't allocate any purchases to one particular bond that was being offered to us, whose price had gone up very substantially in the market that morning, against the run of the market." He added that the Bank had been sufficiently concerned to refer the case to the Financial Services Authority – which was succeeded in April by the new regulator, the Financial Conduct Authority. News of the investigation follows a series of high-profile scandals over shady practices in the City.

Bank of England refused to buy one particular government bond over concerns there had been an attempt to manipulate the market.Three brokers have been charged over allegations of rigging the key interest rate Libor, while the FCA is also studying claims that energy trading firms sought to rig the wholesale gas market.

Fisher said there had also been several other occasions when the Bank had been sufficiently concerned about the behaviour of certain traders in the market to demand an explanation from them.

Andrea Leadsom, the Conservative MP whose questioning prompted Fisher to reveal the investigation, said it would be, "an ultimate irony, not to mention a public outrage," if bankers had tried to fix a process that was partly aimed at stabilising the financial system. Fisher agreed that, "if that was what they were doing, it would be thoroughly reprehensible".

Since QE was launched in March 2009, the Bank of England has bought a total of £375bn-worth of gilts, using electronically-created money, through so-called "reverse auctions", where bondholders such as banks compete with each other to sell their bonds to Threadneedle Street.

The FCA made no comment, but MPs are expected to press the regulator's chief executive Martin Wheatley about the investigation when he appears before the committee in the autumn, if no public announcement has been made by then about the outcome.

Fisher appeared before the committee – with Robert Stheeman, the chief executive of the government's Debt Management Office – to discuss the merits and challenges of QE. Fisher conceded that extricating the Bank from the unprecedented policy would be "the biggest challenge we will have had for 50 or 60 years". But he reinforced market expectations that such a change was some way off.

News on Tuesday that inflation had risen to its highest rate in more than a year posed further challenges for the Bank as it considers whether to extend QE in the face of a fragile economy. Official data showed inflation hit 2.9% in June, less than the 3.1% level that would have forced the governor Mark Carney to write an explanatory open letter to the chancellor, George Osborne. But with wage growth at just 1.3%, the rise in the cost of living means pay continues to fall in real terms.

The TUC said that Britain's workers are suffering the most protracted squeeze on their incomes since the long depression of the 1870s. Its calculations based on Bank of England data suggest real wages have now fallen for 40 months. The only time they fell for a longer was from 1875 to 1878.

The TUC's general secretary Frances O'Grady said the rise was "further bad news for households and the wider economy".

Article Source : http://www.guardian.co.uk

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Archbishop backs payday loans alternatives

Justin Welby suggests credit unions use church halls in effort to promote alternative to £2bn payday lending industry

Two thousand years after the financial services industry was ejected from church premises, the Archbishop of Canterbury not only wants to invite the money-changers back in – he wants churchgoers to help them expand their lending.

Justin Welby is promoting credit unions as a credible alternative to the booming £2bn payday lending industry, and says it will help match often vulnerable, low-income borrowers with the most appropriate lenders. He is proposing that credit unions be allowed to use church halls and other properties in order to better access customers. Welby also wants to encourage churchgoers with financial expertise to help these lenders.

Welby, who sat on the parliamentary commission on banking standards and has been an outspoken critic of the financial industry, believes a successful credit union sector could pose a challenge to high-street and internet payday lenders, who target often vulnerable borrowers with expensive loans.

Malcolm Brown, the Church of England's director of mission and public affairs, yesterday said: "It is not about regulating them [payday lenders] out of business. If the market is functioning as it should, there should not be any need for them to exist."

The government has also pledged to spend £38m to strengthen credit unions.

Speedy Cash loans shop in Brixton, south LondonMany high street banks have retreated from offering small, short-term loans in recent years, while demand from low-income groups has soared, sparking an explosion in lightly regulated payday lenders.Welby's intervention comes as ministers and regulators also grapple with how best to curb the ballooning payday lending industry without choking off small-sum credit to low-income groups. Consumer minister Jo Swinson will meet with lenders as well as with debt charities and campaigners to discuss what she calls "widespread irresponsible lending".

Last night she said she would tell companies: "The industry needs to do so much more to get its house in order, particularly in terms of protecting vulnerable consumers. I am concerned that the lenders are not living to the spirit or the letter of the codes of practice."

However, in a weekend column in the Sun newspaper Swinson made clear the government would not impose a cap on loan costs. "That could shut down short-term loans and force people towards illegal loan sharks or other extreme measures," she said. "The solution needs to be more sophisticated than this."

While Welby's plans stop short of inviting church commissioners, who oversee £5.5bn of the Church of England's wealth, to put financial muscle behind credit unions, he nevertheless wants the church to use other means at its disposal to get behind such lenders. The church is also building plans for its own in-house credit union for the clergy, which it hopes will eventually help it build expertise that can be shared with grassroots lenders.Labour's shadow treasury minister Chris Leslie said ministers had "consistently ducked clamping down on predatory pricing and extortionate interest charges". He said regulators already had the power to control costs and loan duration but the political will was absent.

Payday lenders have variously been accused of failing to properly compete with one another on the cost of loans; of conducting too few checks on the financial means of borrowers; and of using overly aggressive tactics to extract repayments.

The OFT referred the industry to the Competition Commmission last week, after repeated warnings that it must get its house in order met with only mixed responses.

Justin Welby, the archbishop of Canterbury. His intervention comes as regulators grapple with how to curb the payday lending industry.One successful payday lender, Wonga.com last week increased customer loan costs to the equivalent of 5,853% APR. Speaking ahead of the meeting with Swinson, co-founder Eric Damelin claimed his company and others were being "used as political footballs". He claimed to be in favour of regulatory reform. "We don't want no regulation, as we want to keep the bad guys out".

At the top of the agenda for the meeting Swinson has called will be the new regulatory regime, which comes into force from April next year, under which industry must answer to the Financial Conduct Authority rather than the Office of Fair Trading. Officials from both the FCA and the OFT will address the meeting.

Last month the House of Common's public accounts committee said the OFT had been "ineffective and timid in the extreme" in regulating payday lenders.

Article Source : http://www.guardian.co.uk

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FCA to collect mortgage borrowers' personal data

Regulator's proposals could spark privacy row and may have data protection and human rights implications

The personal financial information of millions of people – including how much they earn and whether they have fallen behind on any payments – is to be "collected and processed" by the UK's main financial watchdog as part of its attempts to police the mortgage market.

However, the Financial Conduct Authority (FCA) could spark a row over privacy after acknowledging that its proposals may have data protection and human rights implications.

The regulator is promising that people's personal data will be "fairly and lawfully processed," and said the plans mean it will be able to share information with the police about suspected mortgage fraud. However, it will also be sharing the data with the Bank of England and its Prudential Regulation Authority.

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If the FCA's proposals are approved, it will begin harvesting vast amounts of data relating to both new and existing mortgages.

For new home loans this will include:

• details of each borrower's income, such as bonuses and overtime pay

• information on household spending and other commitments such as maintenance and child support

• total outstanding credit commitments such as loans and credit cards

• whether the borrowers have any financial black marks against them, such as loan arrears or county court judgments

• the number of dependent children they have

• the age at which they are planning to retire

The "performance data" gathered on existing mortgages would be less detailed but include the property's postcode and an estimate of what it is worth, plus information on the current outstanding balance and any arrears.

It has been clear for some time that those who apply for a mortgage can expect lots more personal questions as a result of the FCA's ongoing shakeup of the home loans market, designed to prevent a return to risky lending.

Millions of people could be affected by FCA proposals to 'collect and process' personal financial information.

As part of its long-running "mortgage market review", originally announced in 2009, new rules covering the sector will take effect in April 2014. However, the FCA's desire to collect much more detailed information about individual borrowers will have come as a surprise to many.

The FCA said the plans reflected its objectives to protect consumers by: helping it identify risks and prevent harm; enabling it to make "quicker and bolder" decisions to keep the market running efficiently; promoting effective competition.

However, the regulator acknowledged that the proposals will mean it will have responsibilities under data protection and human rights acts:

"Any personal data we collect will be fairly and lawfully processed in compliance with the first data protection principle ... We consider that in collecting the data we will be acting compatibly with the right to privacy. The collection of the data is necessary to achieve the aims set out in this consultation paper, and any interference with the right is proportionate to those aims."

The information will be used by the FCA's "policy, risk and research division", in its role as the regulator's "radar," to identify and analyse trends in the market "and provide a more intelligent view of the issues we, consumers and industry face".

The plan is that banks, building societies, credit unions and other mortgage firms would need to begin collecting the new data from the start of 2015. The changes will mean extra costs for the 250 companies that submit mortgage product sales data.

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Article source : http://www.guardian.co.uk \