Currency benchmark faces scrutiny
Reports look at concerns about potential manipulation by dealers
The Bank of Canada said in an internal report that it’s examining the way its own reference rate for the Canadian dollar is set as pressure builds globally to prevent alleged manipulation of benchmark currency rates.
The methodology used to set most currency benchmarks, including the noon rate for the Canadian dollar, leaves foreign- exchange markets open to manipulation, according to government documents. The Bank of Canada said it views possible collusion between dealers as a “serious concern” and has produced at least three studies on its own reference rates since the allegations involving Londonbased traders were first reported by Bloomberg News in June.
A dozen authorities on three continents are investigating claims of manipulation as policy- makers and the private sector look for ways to reform currency benchmarks. The Bank of England suspended one employee last week and Bank of England governor Mark Carney was questioned by lawmakers after documents showed concerns over manipulation were raised as early as 2006.
“If banks are colluding with information about their overall fix positions then this is a serious concern,” the Bank of Canada wrote in a report on Oct. 25, 2013, and titled Reform of Financial Reference Rates and Potential Implications for FX Benchmarks.
Under a section called “Scope for Manipulation,” the report notes the procedures used to set most currency benchmarks are susceptible to manipulation. The most recent report was dated Jan. 10.
“The Bank of Canada takes this issue very seriously, and because of the importance of financial benchmarks to the global economy and financial system stability, the bank is actively involved in the efforts of authorities around the world to ensure their robustness and credibility,” Dale Alexander, a spokeswoman at the central bank, said from Ottawa. “It is important to note that the bank has no evidence of foreign- exchange market manipulation in Canada.”
The central bank is working with the Financial Stability Board in its efforts to reform financial benchmarks, including foreign exchange benchmarks, Alexander said.
The documents were meant to provide general context on the issue of foreign- exchange fixes, she said.
Carney, who left his job as Canada’s central bank chief in June, told a U. K. parliamentary committee this week he suspended an employee for failing to escalate the issue of currency manipulation after records seemed to show senior currency dealers discussed with central bank officials concerns that the market was being manipulated as early as 2006.
The Federal Reserve Bank of New York in 2012 examined how benchmark currency rates were calculated after accusations emerged that banks manipulated the London interbank offered rate, Andrea Priest, a spokeswoman for the New York Fed, said Wednesday. The New York Fed- sponsored Foreign Exchange Committee “undertook an effort to catalogue existing rates. This effort did not reflect concerns specific to the FX rate.”
The most used benchmarks for 160 currencies are the WM/ Reuters Rates, which help set the value for what Morningstar Inc. estimates is $ 3.6 trillion in funds, and are determined by trades executed in a minute- long period called “the fix,” starting 30 seconds before 4 p. m. in London.
The Bank of Canada uses a similar method, averaging trades over a twominute window about noon, to determine its reference rate for the value of the Canadian dollar versus its U. S. counterpart.