Banks and compliance: How a new communications system could prevent rate fixing scenarios
To manually set rates to be more profitable for certain organisations, multiple influential traders need to agree on a rate.
The rigging of the London Interbank Offered Rate (Libor) by Citicorp, JP Morgan Chase, Barclays, Royal Bank of Scotland and UBS has resulted in fines of more than $5.8bn (£3.75bn, € 5.3bn) and major bank's images being severely harmed.
Although banks might seem like big corporate machines that do not care about people on the streets, Kailash Ambwani, chief executive of corporate communications company Actiance, told IBTimes UK the banks are actively trying to prevent rate setting from happening.
Actiance is currently developing a a real-time communication system called Actiance Trusted Communities (ATC), that can be used by banks and other trading companies that would prevent rate setting.
Libor scandal in brief
On 3 August, Tom Hayes was found guilty on eight criminal counts of conspiracy in the Libor fixing trial and was sentenced to 14 years in prison.
Hayes, a former UBS and Citigroup trader who was charged after being arrested in 2012, had pleaded not guilty on all counts. He claimed he was not acting without dishonesty, arguing he was just trying to do his job for his employers and said senior management was often aware of his actions.
Libor rigging and manipulation of other interest and foreign exchange rates, are among the biggest scandals from the finance world after the 2008 collapse of the industry.
By adjusting policies within the system to limit the number of specified traders who enter a chatroom, the system can attempt to avoid scenarios in which traders could easily rig rates.
"Because of the pace of trading, traders depend on real-time chatrooms to communicate," Ambwani said. "By making sure that, for example, no more than three currency traders can communicate at the same time, we hope to prevent rate setting from happening."
To manually set rates to be more profitable for certain organisations, multiple influential traders need to agree on a rate. The communication between these traders, internally and between different companies, now happens in chatrooms, Ambwani says.
"You used to be able to have more control over the conversations held between these people," he said, "when everything went by email or phone. Now that the pace of trading has picked up significantly, banks cannot wait for those communication methods."
"ATC helps the control over these chatrooms, and helps the banks set sharper lines between what kind of communication is allowed and what isn't," Ambwani said. "There will be a lot less grey areas."
Organisations can individually set their policies, allowing, for example, no more than four Forex traders in one chatroom. If traders from different organisations with different policies get in touch, ATC would always assume a 'halt' position and apply the policy with a lower limit.
Ambwani said that, in light of the Libor rigging scandal and other rate settings, there is a great demand for internal policy regulation, which is made a reality by ATC.
"In these big financial corporations, there are two parties, essentially. You have the traders, who have to be quick, smart and aggressive in order to make money for the bank, and there is management, which wants money to come in, but also wants to maintain a good reputation for the bank and prevent it from having to pay billions in fines."
Although some argue that the entire banking culture needs an overhaul, reform from within, automatically regulated, might be the a vital step towards more honest banking.
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