Now is the time to iden­tify the real cul­prits

The Star Early Edition - - OPINION & ANALYSIS - Bloomberg Ed­i­tors

REG­U­LA­TORS in the UK, the US and Switzer­land have moved with im­pres­sive speed to ex­tract about $4.3 bil­lion (R48.2bn) from some of the world’s largest banks for their role in rig­ging global cur­rency mar­kets. Now comes the hard part: iden­ti­fy­ing and pun­ish­ing the peo­ple who ac­tu­ally did the ma­nip­u­lat­ing.

The set­tle­ments with six banks – UBS, Cit­i­group, JPMor­gan Chase, Bank of Amer­ica, Royal Bank of Scot­land and HSBC Hold­ings paint a pic­ture that has be­come de­press­ingly fa­mil­iar from pre­vi­ous mar­ket-ma­nip­u­la­tion scan­dals, rang­ing from com­modi­ties to in­ter­est rates.

For­eign-ex­change traders prof­ited at their clients’ ex­pense by abus­ing in­for­ma­tion about or­ders, and they con­spired to in­flu­ence London-based fi­nan­cial bench­marks that af­fected tril­lions of dol­lars in trans­ac­tions and in­vest­ments world­wide.

The rel­e­vant trans­gres­sions went on from 2008 through late 2013, per­sist­ing even as some of the same banks were reach­ing set­tle­ments over the rig­ging of the London in­ter­bank of­fered rate, or Li­bor. At least one more bank, Bar­clays, is still work­ing on a deal with au­thor­i­ties.

De­tails pre­sented by reg­u­la­tors il­lus­trate just how com­mon­place the ma­nip­u­la­tion of global bench­marks had be­come. Traders formed groups – with names such as “the play­ers,” “the 3 mus­ke­teers” and “the A-team” – that fo­cused on spe­cific cur­ren­cies.

Us­ing pri­vate chat rooms, they rou­tinely shared in­for­ma­tion about their clients’ or­ders with the aim of push­ing the WM/Reuters bench­mark ex­change rates, set at 4pm London time, in the de­sired di­rec­tion. “Hooray nice team work,” one trader wrote after an ap­par­ently suc­cess­ful at­tempt to “whack” the Bri­tish pound.

Mis­be­haviour on such a scale could not have hap­pened with­out the par­tic­i­pa­tion – or at least the will­ful blind­ness – of nu­mer­ous ac­tual peo­ple, most likely in­clud­ing se­nior man­agers. So it’s en­cour­ag­ing that the UK Se­ri­ous Fraud Of­fice and the US Depart­ment of Jus­tice are con­duct­ing crim­i­nal in­ves­ti­ga­tions, which the lat­ter ex­pects to re­sult in charges some­time next year.

Un­for­tu­nately, the pros­e­cu­tors won’t be able to build cases as strong as they could have been. They came late to the game, start­ing their in­ves­ti­ga­tions only after Bloomberg News pub­lished its first re­ports on the ma­nip­u­la­tion in 2013. Beyond that, London’s for­eign-ex­change mar­kets have ex­isted in a le­gal gray area, where no laws ex­pressly pro­hibit ma­nip­u­la­tion. Two changes would sig­nif­i­cantly im­prove the chances of de­ter­ring fu­ture mis­be­haviour.

First, reg­u­la­tors should rou­tinely screen mar­kets for sus­pi­cious ac­tiv­ity. Sim­ple sta­tis­ti­cal analy­ses were all jour­nal­ists needed to see that some­thing was wrong with bench­marks for cur­ren­cies and in­ter­est rates. The ear­lier pros­e­cu­tors are alerted, the bet­ter their chances of es­tab­lish­ing the full scope of wrong­do­ing.

Sec­ond, bench­mark rig­ging should be a crime in it­self. Its reper­cus­sions ex­tend far beyond the traders in­volved, un­der­min­ing con­fi­dence in mar­kets that play a cru­cial role in the global econ­omy.

The UK is al­ready plan­ning to make ma­nip­u­la­tion a crim­i­nal of­fence by the end of this year, and the Euro­pean Union has di­rected its mem­bers to do the same by 2016.

The for­eign ex­change case il­lus­trates that good mar­ket de­sign alone doesn’t pre­vent rig­ging: The cur­rency bench­marks al­ready met guide­lines that were cre­ated in the wake of the Li­bor rev­e­la­tions. Reg­u­la­tors also need to pay at­ten­tion, and pros­e­cu­tors need laws to en­force.

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