Distortion of the foreign exchange market may go beyond the banks

14 Jan 2015

A recent article by Bloomberg alleges that BP got insider tips on the forex market from various banks. BP has its own forex trading desk and, whilst there is no evidence that it used any tips to benefit its own transactions, it would be hard to think of another reason why such information would be provided.

BP is not unusual in having its own desk. Many non-bank multinationals perform forex trading to hedge the risk of fluctuations where there is a mismatch between the currencies in which they receive income and the currencies of their expenses. However, according to the article, BP’s desk is run as a profit centre, so transactions may be to hedge risk or to make profit (or a bit of both). It is the latter function for which tips would be useful.

Our article Understanding Forex Manipulation explains how banks are alleged to have used foreknowledge of their customers’ transactions to make profitable side-transactions of their own, and to have pooled their knowledge with other banks to make their behaviour more effective.

The forex market is largely unregulated but, as Collyer Bristow partner Janine Alexander says in Bloomberg’s article, the authorities have made it clear that irrespective of whether specific markets are regulated, banks cannot have areas of business where traders behave as if they’re dealing in the Wild West.

BP depends on the banks to execute its transactions and, as Bloomberg said, this makes it a prized customer for banks seeking its business “and a glimpse into potentially market-moving trades” that BP might make. “Passing on information [to BP] was a way to curry favour”.

As BP does not execute its own transactions, it could not have directly manipulated forex benchmarks (like the 4pm London Fix) by “banging the close”; a technique described in our article. However, Bloomberg cites a couple of occasions where BP was provided with advance information about trades which banks intended to execute on behalf of other customers at the 4pm Fix rate, enabling BP to “front-run” the market; another technique described in our article. The loser would have been the other party to any such transaction who entered into it without the same knowledge.

Bloomberg’s discovery raises the questions of whether other major customers of banks –multinationals, hedge funds or pension funds – were provided with such information and of whether such practices also occurred in other benchmarked financial markets such as commodities. If such tips were acted on, it would expand the pool of potential claimants beyond those dealing with the banks to those trading with the customers who obtained the information.

It should be stressed that, despite the provision of information to BP, there is no evidence that it was used, and traders at BP have not been accused of any wrongdoing.

Stephen Critchley

Senior Associate

Collyer Bristow LLP

Additional information