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25 October 2013, Gateway House

Libor, Brent and now…FX

The foreign exchange market is considered the most liquid and transparent in the world. However, recent investigations into alleged manipulation of the foreign exchange rates is a reminder that transparent exchange-based systems alone are not enough to ensure fairness

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Earlier this month the UK Financial Conduct Authority and the Swiss Financial Market Supervisory Authority confirmed that they are investigating leading banks and financial institutions for alleged manipulation of foreign exchange rates. [1]

So far, the authorities have not shared how the rates were being manipulated. Some news reports have explained it as a simple case of “front-running,” a method by which foreign exchange traders can place their orders before their clients, knowing that the client orders will move the rate to their advantage.

Others claim that traders were placing large orders to move the foreign exchange market within a 60-second window at 4pm UK time to manipulate the WM/Reuters’ foreign exchange benchmark used globally.

This news has shocked the financial world. At $5.3 trillion of daily foreign exchange trade, the foreign exchange market is considered to be the most liquid and transparent market in the world with a large number of players and without a single or small group of players holding advantage. [2] The spot foreign exchange market runs on a transparent exchange-based platform. Most of the trades happen real-time on heavily regulated exchanges, markedly different from the submission-led, proprietary benchmark process used by Libor or Brent.

Since these benchmarks are in turn used for financial valuations and transactions globally, the manipulation is likely to get propagated without checks, and the impact will be significant for firms that use the benchmark for corporate or national accounting.

Perhaps, the dominance of a few banks and financial centres has changed the nature of the ‘perfect competition’ that the industry has been popularly known for. Today, Deutsche Bank, Citi, Barclays and UBS account for approximately 50% of the foreign exchange market. [3] Similarly, the UK leads in foreign exchange trades with 41% of the global share, followed by the US at 19%, Singapore at 5.7%, Japan at 5.6% and Hong Kong at 4.1%. [4]

Most curious, though, is that the global financial governance authorities did not see this coming. Since 2011, the international securities organization (IOSCO) and the Financial Stability Board (FSB) have been proactively reviewing the benchmarking process for interest rates, crude oil prices, and other derivative products. [5] But there is no effort underway to review foreign exchange rates and the ensuing benchmarking process. That even You Tube has training videos on how front running can be used in the foreign exchange market, reveals how widely this form of manipulation is known.

The only recent legislative effort in this domain is the guidelines issued for foreign exchange derivative products (options and futures) in the United States under the Dodd-Frank Act. But that also excludes regulation specifically for spot foreign exchange transactions. [6]

Developed economies are damaged by such manipulation of course. But more hurt are the developing and emerging markets, as they are ‘price takers’ (as opposed to ‘price makers’). India directly uses Brent for pricing oil and is indirectly affected by the offshore speculative currency market for the rupee.

Since the spot trading of the Rupee happens only in India, it is unlikely that the manipulations affect us in this instance. The only possible link could be with the Non-Deliverable Forwards (NDF) market, the speculative markets based in Dubai, Singapore or London, whose rates are used by the benchmarking companies. This offshore market has grown larger than the currency trading market in India; it became an important concern this year after the speculation was suspected of catalyzing the dramatic fall of the rupee. If collusion can manipulate an exchange-based trade, it is can certainly happen for an over-the-counter speculative trade to benefit special interests. The Monetary Authority of Singapore has been reviewing the conduct of traders in the NDF market since September 2012 along with other financial benchmarks, and is currently implementing a new framework for regulating the market. [7]

If front running is happening with the rupee, it is being done domestically and below the radar. Currency derivatives are open to scrutiny by regulators as all trades are conducted on the exchange; but majority of the spot market is happening over-the-counter (OTC), which makes it difficult to monitor.  It is only when banks are audited or investigated after front running has occured that there is any hope of learning about such cases.

India needs to act proactively, moving these transactions to transparent exchanges, and using software to aid the monitoring – similar to what SEBI currently does for stock markets using the Integrated Market Surveillance System (IMSS) for spotting suspicious trades. It is the best, even if not sufficient, way to ensure that the market is less vulnerable to manipulation by the operators.

K.N. Vaidyanathan is Senior Geoeconomics Fellow, Gateway House and Chief Risk Officer, Mahindra & Mahindra Ltd.

Akshay Mathur is Head of Research at Gateway House: Indian Council on Global Relations.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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  1. Financial Conduct Authority, (2013). Statement on foreign exchange market investigation. Retrieved from website: and Swiss Financial Market Supervisory Authority FINMA, (2013). FINMA is investigating possible manipulation of foreign currency exchange rates. Retrieved from website:
  2. Bank for International Settlements, (2013). Foreign exchange turnover in April 2013: preliminary global results. Retrieved from Bank for International Settlements website:
  3. Euromoney FX survey 2013. (n.d.). Retrieved from
  4. Bank for International Settlements, (2013). Foreign exchange turnover in April 2013: preliminary global results. Retrieved from Bank for International Settlements website:
  5. Financial Stability Board, (2013). Overview of progress in the implementation of the G20 recommendations for strengthening financial stability . Retrieved from Financial Stability Board website: and
    International Organization of Securities Commissions (IOSCO), (2013). Principles for financial benchmarks – consultation report (CR04/13). Retrieved from International Organization of Securities Commissions (IOSCO) website:
  6. U.S. Government Printing Office, (2013). Federal Register-Rules and Regulations (Vol. 78, No. 68). Retrieved from website:
  7. Monetary Authority of Singapore, (2013). MAS proposes regulatory framework for financial benchmarks. Retrieved from Monetary Authority of Singapore website:

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