The U.S. Securities and Exchange Commission (SEC) is investigating whether currency traders at the world’s biggest banks distorted prices for options and exchange-traded funds (ETFs) by rigging benchmark foreign-exchange rates, according to two people with knowledge of the matter.
The SEC’s inquiry adds to European and U.S. regulatory probes of possible manipulation in currency markets. The SEC’s investigation is in the early stages, said the people, who asked not to be named because the matter isn’t public. The Commodity Futures Trading Commission (CFTC), which regulates foreign-exchange derivatives, is also investigating possible manipulation, another person said.
Authorities from London to New York have contacted at least a dozen banks as they investigate allegations, first reported by Bloomberg News in June, that dealers said they shared information about client orders to manipulate benchmark spot rates for currencies. Derivatives such as options account for more than half of the $5.3 trillion-a-day foreign-exchange market; the rest is made up of spot transactions.
The involvement of the SEC, which regulates certain options and ETFs tied to the rates, shows how manipulation could ripple across a range of financial products.
“Any corporation with global operations has to hedge currencies using futures and swaps,” said John Coffee, a securities law professor at Columbia University in New York. “If the FX market is manipulated, it can create a loss that is passed on to the consumer and shareholders.”
John Nester, a spokesman at the SEC, and Steve Adamske, a CFTC spokesman, declined to comment.
The SEC joins the CFTC and other U.S. authorities including the Justice Department, Federal Reserve, Office of the Comptroller of the Currency, and New York’s top banking regulator in probing the matter.
Bank of England Governor Mark Carney will appear before Parliament’s Treasury Committee tomorrow to testify after minutes released by the central bank last week showed senior traders had discussed their concerns that currency benchmarks were being manipulated as early as July 2006. The British investigation is being led by the markets regulator Financial Conduct Authority (FCA).
The SEC pursued a similar investigation into whether traders rigged key interest rates, according to two other people familiar with the matter. The CFTC and Justice Department have sanctioned four banks and a brokerage in connection with the probe; the SEC didn’t bring any cases.
Leadership at both agencies has been in transition since the interest-rate investigation began. Mary Jo White, a former prosecutor, took over the SEC in April, pledging to make enforcement a priority for her tenure.
At the CFTC, some of the key officials who oversaw the interest-rate investigation—including Gary Gensler, the former chairman, 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 the foreign-exchange market. The two regulators have historically had jurisdiction over futures and options that are tied to currency rates and traded on exchanges.
The CFTC also gained power under the 2010 Dodd-Frank Act to increase oversight of over-the-counter derivatives, including those linked to currency benchmarks, that are traded directly between buyers and sellers
ETFs, which are required to register with the SEC, are bundles of securities that usually track an index and are listed on an exchange. ETFs have grown to about $2.4 trillion in assets from about $79 billion in 2000, according to BlackRock Inc.
“The price of currency derivatives—swaps, options, and futures—used for ETFs has the spot price embedded in it, so if the spot price is incorrect due to manipulation, then it will impact the price of the ETF,” said Rick Ferri, founder of Portfolio Solutions LLC, a Troy, Michigan-based financial adviser with $1.3 billion in client assets.
More than 20 traders have been fired, suspended, or put on leave by top currency-trading firms including Citigroup Inc., Barclays Plc, and Deutsche Bank AG. Companies including Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc have announced their own internal reviews.
At the center of the probes is the WM/Reuters rates used by companies and investors around the world. Those rates serve as a basis for computing the day-to-day value of holdings by index providers such as FTSE Group and MSCI Inc., which track stocks and bonds in multiple countries.
While the rates aren’t directly followed by most investors, even small movements can affect the value of what Morningstar Inc. estimates is about $3.6 trillion in funds including pension and savings accounts that track global indexes.