FX Fixing Scandal Exclusive: Whistleblower Alerted US, UK and Swiss Authorities in 2011

A whistleblower alerted regulators in the US, UK and Switzerland in 2011 about some of the world's largest trading companies and banks manipulating benchmark sterling, US dollar and Swiss franc currency rates, IBTimes UK can exclusively reveal.

But the watchdogs in question were sketchy on whether they were actively investigating claims, despite a raft of reports emerging that suggest that market manipulation forced currencies to swing by double-digit percentages within a day.

In a number of documents and emailed correspondence seen by IBTimes UK, the unnamed whistleblower, who has worked at major companies that are vulnerable to swings in currency market movements, contacted the Commodity Futures Trading Commission (CFTC) in the US, Britain's Financial Services Authority (FSA), and Switzerland's Finma over two years ago.

The daily $4.7tn (€3.5tn, £3bn) currency market is the largest in the financial system and is pegged to the value of trillions of funds, derivatives and financial products. Morningstar estimates that $3.6tn in funds, including pension and savings accounts, track global indexes.

Correspondence between the individual and each regulator have garnered very different responses.

The individual revealed in detail how some companies, which IBTimes UK cannot name under promise of anonymity, would move markets to such an extent that it would only be possible under market manipulation.

The whistleblower used examples on how major currencies, such as USD & GBP in August 2011, had such violent price swings that 'major market manipulation' could be "the only way" for this to occur.

"I first noticed the severe market movements in 2006/2007 and alerted as many authorities as possible. I said it was impossible to move major currencies such as GBP and US Dollar by 118% and 123% respectively, especially in such a short time period," said the whistleblower to IBTimes UK.

"There is simply not enough paper money in the world to achieve these deliberate movements. But the movements killed everybody that was on the other side of the trade.

"We see headlines about how shocking it is when equity markets fall by 5% but how about currency prices plunging by double digits within a day?"

CFTC and Finma

Since the whistleblower is based in Switzerland, the CFTC had to gain permission from Swiss authorities Finma to pursue the line of inquiry.

After gaining permission some months later to talk to the whistleblower, it contacted the individual to say it would be looking into claims, but has not contacted the whistleblower since.

The CFTC declined to comment on the details of the correspondence and whether it is actively investigating FX market manipulation to IBTimes UK.

Finma had not returned calls or emails from IBTimes UK by the time this article was published.

European Commission and FSA

In other parts of Europe, the individual contacted the FSA, which is now the Financial Conduct Authority (FCA) but the response to the whistleblower's claims was met very differently, compared with the US regulators.

The correspondence showed that the individual contacted the FSA several times. It also showed the person contacted the European Commission's Complaints Commissioner.

However, while the Commissioner responded and acknowledged the existence of FX market manipulation claims to the FSA, it said it "usually is only able to consider a complaint once the FSA's Complaints Team has itself investigated the complaint."

A spokesperson at the EC for Internal Markets and Services told IBTimes UK that " the European Commission cannot investigate and sanction potential individual cases of market abuse [...]. This is the task of national supervisors responsible for in this case looking at the forex markets. Therefore I would advise you to refer the matter to the national authority responsible based where the alleged wrongful conduct took place. "

"We have seen reports that traders have manipulated foreign-exchange rate benchmarks used to set the value of trillions of dollars of investments. These developments, following on from the other recent allegations and investigations into the manipulation of oil, biofuel, gas as well as interest rate benchmarks, once again highlight the need for a broad based regulatory regime.

"All benchmarks share similar vulnerabilities so there is a need for a framework that applies to all benchmarks to ensure their integrity and restore market confidence. We proposed last year to amend our market abuse legislation to make sure direct manipulation of benchmarks becomes a crime, subject to criminal sanctions. Council and Parliament are now at the stage of negotiating a final text. We will also be making a proposal this Summer on the framework for benchmarks."

The FCA told IBTimes UK that it cannot confirm or deny whether an investigation into FX market manipulation is occurring. It also says it cannot comment on the individual's, or any single person's, claims. It also added that it is "perfectly normal" that a whistleblower would not be contacted and briefed on how the investigation is going - if there is an active one.

But, as the FCA told IBTimes UK last week that while the regulator was 'aware of the claims' that traders have teamed up to rig rates, it was "certainly too early" to know whether the watchdog will go ahead with a formal investigation.

"I wouldn't say I am a whistleblower in the original sense of the word, I merely was highlighting how market movements were severe and that several people and certain institutions are doing this," said the anonymous source.

"I cannot believe that this is still being allowed to happen. How can rates moving by 5, 6, 12 or even 13% a day be considered normal? It's not rocket science seeing the charts and realising that these movements cause concerns, but by ignoring it for years, it has only made it worse."

FX Market Regulation

The FX market is one of the least regulated markets and has no rules to combat 'insider trading'. Trading activity is difficult to monitor as a majority of the massive amount of volume takes place in the over-the-counter marketplace.

For example, this report related to some banks engaging in manipulating currency benchmark indexes.

The direct manipulation of market indexes was not explicitly covered by the EC's October 2011 proposal to revise current market abuse rules.

Therefore, on 25 July 2012, the EC proposed amendments to the legislative proposals on insider dealing and market manipulation, including criminal sanctions, initially tabled last October.

These amendments will clearly prohibit the manipulation of benchmarks, including Libor and Euribor, and make such manipulation a criminal offence.

Another aspect of potential manipulation of market indices is the process through which the rate is set.

The EC therefore launched a consultation in September 2012 to examine alternatives to the current system of self-regulation based which has "clearly failed to act in the public interest".

"We will take the responses into account in our impact assessment and legal drafting, and we plan to bring forward a Commission proposal in mid-2013," said the EC in a statement.