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EXCLUSIVE

Chatroom evidence questions BoE role in FX probe: sources

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[March 20, 2014]  By Jamie McGeever

LONDON (Reuters)  British regulators are examining evidence relating to a 2012 meeting of currency dealers and Bank of England officials which potentially challenges the central bank's assertion it had not condoned sharing details of client orders.

The practice of sharing details about such orders is at the center of a global rigging probe.

Transcripts of a foreign exchange chatroom, now in the hands of Britain's Financial Conduct Authority, reveal for the first time that an un-named senior dealer who attended the meeting told fellow traders the next day that Bank officials had agreed there were advantages to sharing client order information to minimize market volatility around daily reference rates known as "fixings", two sources familiar with their content told Reuters.

By sharing information during these fixings, traders are able to match trades and minimize price swings, thereby lessening the risk they take on big transactions.

These and other transcripts are now part of the formal investigation by the FCA into allegations of collusion and manipulation of the $5.3 trillion a day global foreign exchange market. Reuters was unable to view the precise words of the senior trader because the transcripts are confidential.


The chatroom transcript, dated April 24, 2012, could now become a central piece of evidence in the probe as it is one of the few pieces of written material from the time of the April 23 meeting in London to have so far come to light.

At stake is whether the Bank of England, in its role as the official monitor of London currency markets that command some 40 percent of the global market, was aware of and condoned activity among market-making banks that is now alleged to have amounted to collusion and manipulation.

A Bank of England spokeswoman said the Bank's oversight committee is conducting an investigation into whether any BoE official was involved in the sharing of confidential client information or aware of the sharing of such information between FX market participants, and therefore it would not be appropriate to comment. The FCA also declined to comment.

The Bank of England originally said its minutes of the meeting, which were released in January following a freedom of information inquiry by Reuters, were not prepared until more than a year after the meeting in June 2013.

Additional searches at the Bank, however, uncovered an email showing that the minutes were in fact drafted and circulated to members in July 2012.

The Bank suspended an unnamed employee on March 5, pending investigation by the bank into compliance with its processes.

The Bank said in a previous statement that the record of the April meeting "does not show any discussion of actual or alleged manipulation of FX benchmarks".

However, sources familiar with the proceedings of the meeting have told Reuters that the regular gathering of chief dealers and Bank officials, which on this occasion was held at the central London offices of French bank BNP Paribas, openly addressed the routine sharing of client information between senior dealers at the top foreign exchange banks.

And one of the senior dealers present at the meeting has since lodged copies of his own notes with the FCA, they added.


Testimony from BoE governor Mark Carney and the central bank's markets chief Paul Fisher last week said discussions between the Bank and top dealers about potential manipulation around key market fixings in previous years had only delved into the activity of non-bank players such as hedge funds.

Fisher, who was head of foreign exchange at the central bank until 2009, said last week that he was unaware of any allegations of collusion between traders "until we heard this news that started to come through last year (2013)."

The only reference to any discussion is in the minutes of the meeting of the chief dealers subgroup of the BoE-sponsored Foreign Exchange Joint Standing Committee, which were released in January which simply say: "There was a brief discussion on extra levels of compliance that many bank trading desks were subject to when managing client risks around the main set piece fixings".

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Minutes were not taken of that specific part of the discussion at the request of chief Bank of England currency trader Martin Mallett, who chaired the committee, according to one source familiar with details of the meeting.

Mallett has not responded to Reuters attempts to contact him and the Bank of England declined comment.

ON THE HUNT

Allegations senior traders in the FX market had shared client order information with each other first became public in June last year.

Britain's market regulator began looking into these allegations at least as far back as early 2013 and formally announced it was investigating in October, the same month the U.S. Justice Department opened its own probe.

The foreign exchange market's main industry body, the ACI, says that banks must be allowed to share details of their overall position with others, but differentiate between that and either cartel-like collusion to move the market or the breaking of confidentiality agreements with particular clients by sharing details of their orders, both of which go against the ACI code of conduct.

More than 20 traders at some of the world's biggest banks have so far been placed on leave, suspended or fired. Carney and other senior financial figures have said the FX investigation could be bigger than the Libor rate-rigging scandal, which has triggered criminal prosecutions and $6 billion in settlements.


Carney said he was first alerted to allegations BoE staff may have somehow been involved or aware of market rigging on October 16, which prompted an internal investigation within 48 hours.

"We have no information that suggests that anyone at the Bank of England condoned manipulation, or facilitated, participated in market manipulation," Carney said.

Industry, market and legal sources contacted by Reuters all said they could not recall a major central bank suspending an individual as part of an investigation into allegations of market manipulation.

"It's highly unusual for a central bank to find itself in this position, and they have some difficult questions to answer," said Vivienne Tanchel, a barrister and former City of London trader now specializing in criminal, regulatory and financial litigation, at 2 Hare Court in London.

At the same Treasury Select Committee hearing, Fisher said that discussions between BoE officials and traders about possible manipulation in 2006 and 2008 centered on third-party forces such as hedge funds moving the market with big trades.

He made a clear distinction between that and collusion, which is what is under investigation now and which he said he knew nothing about until last year.

"It isn't our job to go out hunting for rigging on markets," Fisher said.

(Editing by Alexander Smith, David Evans and Cynthia Osterman)

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