Foreign currency probe revelation

00:01, Apr 07 2014

A Commerce Commission probe into currency market manipulation was sparked by an alleged cartel member seeking immunity from prosecution, the regulator says.

The commission this morning confirmed its investigation into "possible manipulation of currency rates and possible influencing of benchmarks in foreign exchange markets".

The investigation followed an application for leniency under its policy to grant conditional immunity from prosecution to the first member of a cartel to come forward with evidence, it said.

It declined to comment further, and would not say which banks were involved, explain the nature of its investigation, or how long it was expected to take.

The commission action is one of several regulatory probes around the world after allegations emerged last year that senior currency traders had colluded to influence currency movements and rip off customers.

Organisations likely to be affected are those that use banks to place significant foreign exchange orders on the spot market.


Customers can either order at the market price, or at a fixing benchmark rate, the most widely used of which is the WM/Reuters Closing Spot Rates.

Calculated at 4pm London time, it is also known as the "London close".

As well as regulatory action, a class action has been filed in New York by clients of several major banks, claiming they were ripped off by a conspiracy to manipulate the forex market. At least two of the banks named in the lawsuit are also active in New Zealand.


The suit claims traders using chat-room names such as "The Cartel," "The Bandits' Club," and "The Mafia," exchanged confidential customer order information and trading positions.

Defendants are the Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS and UBS.

Deutsche Bank and JP Morgan Chase are both registered banks in New Zealand, while UBS has a local subsidiary.

The lawsuit claims the manipulation of the London close impacted the pricing of trillions of dollars' worth of forex instruments, "inflicting severe financial harm on plaintiffs and members of the class".

Global Probe The lawsuit claims law enforcement and regulatory authorities around the world, including the United States, Europe, Asia, Australia, and New Zealand, are actively investigating.

New Zealand's four biggest banks - ASB, ANZ, Bank of New Zealand and Westpac - are all Australian-owned.

A spokesperson for the Australian Competition and Consumer Commission said it would not comment on matters it "may or may not be investigating".

Swiss authorities have formally opened a foreign exchange-related investigation into several banks, which includes heavyweights JP Morgan Chase, Barclays and Citigroup.

In Britain, Reuters reported that about 30 traders were known to have been placed on leave, suspended, or fired as a result of the inquiry.

It is possible that the global crackdown has particular relevance to New Zealand.

At a monetary policy briefing last month, Reserve Bank governor Graeme Wheeler pointed out that the New Zealand dollar was between the 7th and 10th most-traded currency internationally.

Daily turnover was about NZ$100 billion, or roughly half of an entire year's worth of gross domestic product.

"Our currency is enormously, intensively traded," he said.

However, about 90 per cent of that trading takes place overseas.

The foreign exchange investigation comes in the wake of the Libor scandal, when it emerged that banks were manipulating interest rates to profit from trades.

Although that resulted in billions of dollars of fines for some banks and brokers, the sheer scale of the foreign exchange markets means the impact could be even greater.


The commission has new powers which allow it to conduct compulsory interviews, which it is using to interview bank staff in an unrelated investigation over the selling of interest-rate swaps.

However, the banks themselves appear to have no idea that they may be under close scrutiny.

New Zealand Bankers' Association chief executive Kirk Hope said: "None of the banks we have spoken to have been approached by the Commerce Commission on this.

"We have no information about the basis of the investigation, the process involved, or who is being investigated."

Massey University banking expert David Tripe said some people might get the impression that the commission was engaged in a "witch-hunt" of sorts.

"It wouldn't do any harm if they were a little bit more open, a little bit more transparent about their processes and exactly what they were doing," he said.


The New Zealand Superannuation Fund, which manages Kiwis' future retirement savings, trades foreign exchange regularly.

However, head of communications Catherine Etheredge said it was not affected, as it did not conduct or set trades based on any external benchmarks.

"We have our own in-house Treasury team and systems to manage the fund's foreign exchange exposure," she said.

Etheredge said the fund did not use forward contracts that reference the fixing referred to in the lawsuit.

"We work through local agents of international banks as well as dealing directly with overseas contacts, including some of the banks mentioned," she said.

However, it was possible that some of the managed funds the fund invested in might in turn have been victims of the alleged manipulation.