Britain’s chancellor George Osborne outlined on
Thursday tougher penalties for banks rigging the foreign
exchange markets but in the FX futures markets the same banks
who are being punished have the perfect opportunity to clean up
Osborne said in his Mansion House speech that he plans to
extend laws introduced in the aftermath of the Libor fixing
scandal to include foreign exchange, commodities and fixed
The chancellor said he wants to impose tougher penalties on
firms and individuals found to have colluded to rig these key
benchmark rates and, to this end, has set up a review to be
conducted by the Treasury, the Bank of England and the
Financial Conduct Authority.
The message is clear – the government is coming
down hard on the banks for their continual misdemeanours and
these firms need to be brought into line and be seen to be
brought into line.
The banks then seem to be in for another torrid time and the
fines that could come for FX rigging are said to outweigh those
already imposed for Libor-fixing, which are already running in
the several billions.
The multi-trillion dollar FX business is effectively the
last great unregulated market for the banks.
For this reason, they will also be loath to see the
authorities getting tough because this vast global industry
still yields decent returns at a time when some of their other
top-earners, in the over-the-counter markets for example, have
been regulated virtually out of existence.
Banks, however, are going to have to wake up and smell the
Foreign exchange futures are traded on public exchanges in
the US, where CME Group is the main venue, and in Asia, where
various groups list these products.
But in Europe currency derivatives are still traded like the
underlying spot FX market, namely bilaterally in the
This leaves them at the mercy of the banks, of which a
handful of global firms dominate FX trading in Europe.
This could be set to change however.
Prop traders are hopeful that the recent launch of 30 FX
futures by CME Europe and the launch next month of six currency
futures on German exchange Eurex could be the start of a
process that sees the control of FX derivatives wrested from
The launches make sense as these products are
well-established in the US and Asia but it is likely these
contracts will not be wholeheartedly supported by the banks, in
the early days at least, because the status quo is simply too
lucrative for them.
It is possible that these contracts will start out supported
by market-makers, prop firms and some of the smaller banks less
reliant on FX for profit, while the big banks could watch from
the side lines.
If things go well, however, and there is sufficient
liquidity and tighter spreads in these markets, the big banks
will have to consider coming in at some stage, though that
could take a few years.
The banks may feel inclined to resist the advent of a
European listed FX contract. But if these contracts
don’t take off for commercial reasons and the
market remains opaque, it is very possible the regulators will
come in and force FX swaps into the light, just as interest
rate swaps have been forced on to exchanges and swap execution
facilities in the US.
Banks complain a lot about the constant flow of draconian
regulation but, in this case, European firms have a choice.
They can decide between accepting they have done wrong, falling
into line with regulatory best practice and saving the
regulators the hassle of having to draft all this stuff into
law, or they can do nothing.
It is a choice, however, they should make mindful of the
fact that if they don’t do it willingly now, they
will be forced to do it later.