FX Probe Extends To Options: "Oh God, Look What We've Uncovered"

Tyler Durden's picture

As an increasing number of FX traders are disappearing from bulge bracket banks (for "entirely unrelated to the FX probe" reasons), the WSJ reports that European and US regulators are expanding the scope of the manipulation probe. In the course of sifting through mountains of documentation, banks have found an array of apparent misconduct, according to people involved with the investigations and now the FX options market has come under scrutiny. "It's the banks saying, 'oh God, look what we've uncovered, there's a whole lot of issues'," a person familiar with the investigation said.

Via WSJ,

A regulatory probe that flamed up in one corner of the vast foreign-exchange market is now engulfing the entire industry.

 

The latest conflagration: concerns about a type of foreign-exchange derivative that is widely used by financial institutions and companies world-wide, according to a person familiar with the matter.

 

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These contracts, which banks often sell to clients, pay out in the event that exchange rates reach certain levels. They are heavily traded: A notional $337 billion changes hands in the overall FX options market each day, according to the Bank for International Settlements.

 

Behind the scenes, though, banks often buy or sell currencies aggressively to prevent those levels from being breached, according to traders and banking executives. That may be to the detriment of clients, who would otherwise potentially receive a payment, these industry officials say, although banks see it as a way to protect their cash. Such tactics are commonplace, traders say.

 

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As part of banks' internal reviews into their foreign-exchange businesses, some recently have found potential problems with trading involving the options, according to the person familiar with the matter.

 

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One former trader at Deutsche Bank in New York was fired after chat room messages showed he joked about his ability to affect the price of a barely-traded currency—the Argentine peso—people familiar with the matter say. The bank has fired three other executives, including at least one in Latin America, in connection to trading practices not related to the London fix, according to a person familiar with the matter.

 

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Authorities are also looking into whether some foreign-exchange bankers inappropriately traded in their personal accounts. This practice is forbidden at some banks, though there is not a blanket ban across the industry. It is frowned upon because of the possibility traders could use privileged information for their own profit.

 

In all, about 20 traders and bankers including some in New York, London and Tokyo have now been suspended or fired since authorities started to investigate the foreign-exchange markets.

As a gentle reminder, here is the original uncovering of at least one of the manipulations:

 

The same pattern -- a sudden surge minutes before 4 p.m. in London on the last trading day of the month, followed by a quick reversal -- occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show