CNBC Comment: FX market probe raises Libor fears

YOU DON’T have to read one of John Le Carre’s spy novels to believe his maxim that “bankers will always get away with whatever they can get away with”. The latest scandal afflicting the industry is the fast-moving investigation into the $5.3 trillion (£3.3 trillion) FX market: just three months in, it has embroiled 10 banks, forced the suspension of 12 traders, and sparked a billion dollar legal suit from an irate client.

The FX revelations have got the industry feeling queasy again, amid fears it could make Libor look like a warm-up act. There is a worry that, wherever a price has been influenced by bankers, benchmarks have been tinkered with, tailored, and a whole lot of secrets have been divulged and shared – mostly on Bloomberg messenger.

But the truth behind Le Carre’s claim is that human nature is even more pronounced when money is involved. The problem with some benchmarks is that those who influenced the price often had a financial stake in the level at which it was set. It should be one of the biggest lessons we learn from the financial crisis: don’t leave temptation unchecked by lax or ineffective rules.

But unlike Libor, FX prices are set by observable transactions rather than a benchmark created by quotes from a handful of traders. For Libor, it was easier for traders to submit quotes that distorted the real market price. For FX, it would need enough traders to agree in advance how they would trade the market during the windows when rates were set. It may be that some of it was simply information sharing – possibly accepted practice in the past, but not accepted in the future or retrospectively.

And according to insiders, staff suspensions have been triggered more by intemperate language than clear proof of rigging in such a liquid market. Traders had reportedly coined some neat lingo too: “banging the close”, “trading ahead” and “painting the screen”. This teenage prose may make it easier for regulators to nail whodunit. Unlike the intricate plots of a Le Carre novel, where spies are masters at covering their tracks, the banking industry seems to be teeming with traders determined to blow their own cover.

How else to explain all that chat room bravado that punctuated market rigging with smiley faces? Luckily, they’re not spying for a living. Nevertheless, there is a worry that yet another scandal will have a profound effect on the trust that people have in markets.

Benchmarks need to be set with clear boundaries, so that those who have a stake in prices do not have undue influence on where those rates are set.

Helia Ebrahimi is UK business editor at CNBC. Follow her on Twitter @heliaebrahimi