Tuesday, October 30, 2012

Probe of interest rate manipulation extends beyond Libor

Bloomberg reports that the probe into the manipulation of Libor has been expanded as it looks like rates on foreign exchange derivatives might have also been manipulated.

It comes as no surprise to regular readers that every place in the financial system where there was and still is opacity bankers engaged in bad behavior.  Opacity enables this bad behavior because it provides a cloak to hide what the bankers are doing.

The simple fact is that we have known since the Great Depression and the Pecora Commission that opacity in any part of the financial system is always bad.

This is why FDR and his administration rebuilt the global financial system on the combination of a philosophy of disclosure and the principal of caveat emptor.

Under this framework, financial regulators were given one and only one responsibility:  ensure that market participants had access to all the useful, relevant information in an appropriate, timely manner so they can independently assess this information and make a fully informed investment decision.

As the manipulation of Libor showed, the financial regulators failed at their responsibility.

As the manipulation of foreign exchange derivatives is likely to show, the financial regulators failed here too in their responsibility.

Like Libor, the solution for ending manipulation of foreign exchange derivatives is to bring transparency to this opaque part of the financial system.

In the case of Libor, bringing transparency means requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
UBS AG (UBSN) and Royal Bank of Scotland Group Plc suspended more than three traders in Singapore as regulators investigating Libor-rigging turn their attention to the rates used to set prices on foreign exchange derivatives. 
At least two foreign-exchange traders at UBS, Switzerland’s largest bank, have been put on leave as part of an internal probe into the manipulation of non-deliverable forwards, a derivative traders use to speculate on the movement of currencies that are subject to domestic foreign exchange restrictions, according to a person with direct knowledge of the operation. Edinburgh-based RBS also put Ken Choy, a director in its emerging markets foreign exchange trading unit, on leave, a person briefed on the matter said on Oct. 26. 
Regulators around the world are broadening the scope of their investigations beyond interbank offered rates such as the London interbank offered rate to encompass more benchmarks.... 
Unlike foreign exchange forward contracts, where two parties agree to physically exchange currencies at a set rate at a specific date in the future, NDF traders settle the net position in U.S. dollars. Who pays and how much at the end of the contract is determined by reference to a fixing rate which in some jurisdictions is set, like Libor, by a survey of banks.

Contracts that reference the Malaysian ringgit and the Indonesian rupiah against the dollar are among NDFs that are traded in Singapore. The spot rates for both currencies are fixed by the Association of Banks in Singapore based on data submitted by banks. If traders can move the spot rates, they could boost their profit, said a person familiar with the process who asked not to be identified.... 

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