Banks Seen Withdrawing From Some FX Trades to Avoid Rules

(Bloomberg) — Global regulators are considering rules for overhauling allegedly rigged currency benchmarks, which will probably spur some banks to stop participating in a key foreign-exchange business, according to State Street Corp.

The Financial Stability Board will likely announce rules tomorrow revising trading procedures for setting benchmarks tracking the $5.3-trillion-a-day currency market, erecting walls between transactions that set those rates for clients and other trades, said State Streets Chip Lowry.

Banks will need to set up some sort of separate area, maybe an agency-style offering, where this flow is executed, Lowry said Sept. 25 at a Profit & Loss conference in Chicago. Ive heard all sorts of interesting ideas from banks about what that would look like, and I can probably tell you that almost none of them would work.

Should fewer trades participate in the benchmark, it could undermine efforts to fix an industry beset by scandal. At the same time, clients will likely have to adjust to changes in the ways they pay for and address their needs for benchmark services. About 25 traders have been fired, suspended or put on leave in the last year amid a flurry of allegations they manipulated currency benchmarks, harming their clients.

Nothings Perfect

Lowry is a senior managing director and head of agency foreign-exchange services at State Street Global Markets, an investment research and trading firm. State Street is a custodian, meaning it keeps records on behalf of institutional investors such as mutual funds, pension funds and hedge funds. The Boston-based bank also manages money for its clients.

Nothing is going to be perfect, Lowry said. You do have to remove even the appearance of an incentive to front run.

Pension funds, companies and other investors rely on exchange rates set during a 60-second window to value their assets.

The FSBs members agreed on the final proposals to reform currency benchmarks at a meeting in Australia earlier this month, according to a statement. The group, which makes recommendations to global regulators, is publishing the outcome of that meeting tomorrow.

If youre a bank, a small- to medium-size bank, and you have clients trading with you, or even a very large bank, my guess is that this flow is not a material part of your business, Lowry said. Is it worth setting up all these extra controls, hiring additional people, setting up a separate space, or do you want to just get this off your plate? My guess is some banks will exit the business.

Scrutinizing Banks

Regulators and prosecutors on three continents are scrutinizing allegations that dealers at the worlds biggest banks traded ahead of their clients and colluded to rig benchmarks that pension funds and money managers use to determine what they pay for foreign currencies.

The U.K. Financial Conduct Authority is in talks with Barclays Plc, Citigroup Inc., HSBC Holdings Plc, JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and UBS AG, with the aim of reaching settlements by November, Bloomberg News reported in July.

World Markets Co., a State Street subsidiary, and Thomson Reuters Corp. collect and distribute the benchmark rates.

Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters in news and currency-trading systems.