Evidence in the BoE FX Scandal Sullies Central Banking

by on March 21, 2014 6:29 am BST

Global central banks have seen a lot of action since the financial meltdown in 2008, or at least the printing presses. Recently, there has been many reports coming to the surface that central bankers tend to be incompetent and self-serving. Transcripts of the Federal Reserve meetings in 2008, recently released, showed a lack of awareness of the symptoms that lead up to the financial meltdown. Even more disconcerting, the Fed had no contingency plan to help with the economic hemorrhaging. Evidence, pointing to the same time frame, has shown that the Fed and the Bank of England (BoE) were aware of the LIBOR (London interbank offer-rate) rigging years before the scandal came to light, and neither bank alerted the proper authorities.

Currently, the BoE is involved in the massive forex rigging scandal that has encompassed several of the largest financial institutions. After releasing a statement through a spokesperson, the central bank said that they did not condone or encourage traders to share client information and intentionally manipulate rates for institutional profits.

However, the Financial Conduct Authority (FCA) is examining  foreign-exchange chatroom transcripts that indicate a senior dealer told traders that the BoE said there were clear advantages to sharing client order information with other traders and institutions. This was done to reduce the institution’s risk and position volatility around the key reference rate windows. With traders knowing other client orders, they were able to match orders prior to this window and reduce their liability.

The central bank’s original statement included “does not show any discussion of actual or alleged manipulation of FX benchmarks,” referring to an April 2012 meeting between BoE officials and forex dealers. Interestingly enough, the chatroom transcript in question was dated April 24, 2012.

The BoE has interests in the forex market as it is the official monitor of London currency markets, which account for roughly 40 percent of the global market. Evidence is stacking up against the central bank to the alleged collusion and manipulation. BoE Governor Mark Carney and the BoE market chief Paul Fischer held discussions about potential market manipulation last week, but it only centered around hedge fund activity.

The problem is, who regulates those whom regulate? Fischer said “it isn’t our job to go out hunting for rigging on markets.” Maybe not, but should central banks have the obligation to alert the proper authorities of potential manipulation? Banking giant JP Morgan has been implicated in the Bernie Madoff scandal and has been fined over $10 billion in fines and legal fees in other devious market activity. There is no evidence JP had anything directly to do with it [Madoff], but they had Madoff as an account holder and terminated his accounts on the suspicion of criminal activity yet told no one years prior to the scandal unraveling.

The BoE as an entity may not have condoned manipulation, but guilt by association is just as damning.