The U.S. Securities and Exchange Commission (SEC) isinvestigating whether currency traders at the world's biggest banksdistorted prices for options and exchange-traded funds (ETFs) byrigging benchmark foreign-exchange rates, according to two peoplewith knowledge of the matter.

The SEC's inquiry adds to European and U.S. regulatory probes of possible manipulation in currencymarkets. The SEC's investigation is in the early stages, said thepeople, who asked not to be named because the matter isn't public.The Commodity Futures Trading Commission (CFTC), which regulatesforeign-exchange derivatives, is also investigating possiblemanipulation, another person said.

Authorities from London to New York have contacted at least adozen banks as they investigate allegations, first reported by Bloomberg News in June, that dealers said theyshared information about client orders to manipulate benchmark spotrates for currencies. Derivatives such as options account for morethan half of the $5.3 trillion-a-day foreign-exchange market; therest is made up of spot transactions.

The involvement of the SEC, which regulates certain options andETFs tied to the rates, shows how manipulation could ripple acrossa range of financial products.

“Any corporation with global operations has to hedge currenciesusing futures and swaps,” said John Coffee, a securities lawprofessor at Columbia University in New York. “If the FX market ismanipulated, it can create a loss that is passed on to the consumerand shareholders.”

John Nester, a spokesman at the SEC, and Steve Adamske, a CFTCspokesman, declined to comment.

The SEC joins the CFTC and other U.S. authorities including theJustice Department, Federal Reserve, Office of the Comptroller ofthe Currency, and New York's top banking regulator in probing thematter.

Leadership Changes

Bank of England Governor Mark Carney will appear beforeParliament's Treasury Committee tomorrow to testify after minutesreleased by the central bank last week showed senior traders haddiscussed their concerns that currency benchmarks were beingmanipulated as early as July 2006. The British investigation isbeing led by the markets regulator Financial Conduct Authority(FCA).

The SEC pursued a similar investigation into whether tradersrigged key interest rates, according to two other people familiarwith the matter. The CFTC and Justice Department have sanctionedfour banks and a brokerage in connection with the probe; the SECdidn't bring any cases.

Leadership at both agencies has been in transition since theinterest-rate investigation began. Mary Jo White, a formerprosecutor, took over the SEC in April, pledging to makeenforcement a priority for her tenure.

At the CFTC, some of the key officials who oversaw theinterest-rate investigation—including Gary Gensler, the formerchairman, and David Meister, ex-head of enforcement—have departed.The agency is currently being led by an acting chairman.

The SEC and CFTC share U.S. oversight of derivatives in theforeign-exchange market. The two regulators have historically hadjurisdiction over futures and options that are tied to currencyrates and traded on exchanges.

The CFTC also gained power under the 2010 Dodd-Frank Act toincrease oversight of over-the-counter derivatives, including thoselinked to currency benchmarks, that are traded directly betweenbuyers and sellers

ETFs, which are required to register with the SEC, are bundlesof securities that usually track an index and are listed on anexchange. ETFs have grown to about $2.4 trillion in assets fromabout $79 billion in 2000, according to BlackRock Inc.

“The price of currency derivatives—swaps, options, andfutures—used for ETFs has the spot price embedded in it, so if thespot price is incorrect due to manipulation, then it will impactthe price of the ETF,” said Rick Ferri, founder of PortfolioSolutions LLC, a Troy, Michigan-based financial adviser with $1.3billion in client assets.

More than 20 traders have been fired, suspended, or put onleave by top currency-trading firms including Citigroup Inc.,Barclays Plc, and Deutsche Bank AG. Companies including LloydsBanking Group Plc and Royal Bank of Scotland Group Plc haveannounced their own internal reviews.

At the center of the probes is the WM/Reuters rates used bycompanies and investors around the world. Those rates serve as abasis for computing the day-to-day value of holdings by indexproviders such as FTSE Group and MSCI Inc., which track stocks andbonds in multiple countries.

While the rates aren't directly followed by most investors, evensmall movements can affect the value of what Morningstar Inc.estimates is about $3.6 trillion in funds including pension andsavings accounts that track global indexes.

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.