The Justice Department and other countries’ financial regulators are investigating sales practices in the foreign-exchange (FX) market as part of a probe into allegations that the world’s biggest banks defrauded their FX clients. According to a Bloomberg News story, the DoJ is interviewing dealers about how sales teams charge customers for FX transactions.
The investigation could find that banks are not properly disclosing pricing for currency transactions and are taking advantage of the lack of transparency. Banks profit from FX by charging customers a “hard markup … tacking on a small margin for the salesperson’s services,” according to Bloomberg News. The markup is justified but “open to abuse,” says Bloomberg.
The root of the problem is that “banks aren’t required to provide time stamps showing when currency transactions are completed, as they do with equities, giving dealers an opportunity to mislead about the rate at which orders were executed.” So a banker could report that a U.S. dollar to euro swap occurred at a later, higher price, when the bank’s trader actually executed the order at a cheaper rate earlier in the day.
Corporate customers actually enable banks to do this by asking bankers for an “at-best” price, which only requires execution at “the optimal market rate,” says Bloomberg. More sophisticated clients ask for a “two-way” price, which guarantee rates regardless of market movement.
The other thing companies do wrong is place an order and just wait for an e-mail confirmation. Bloomberg says more experienced FX clients “call in their orders and insist on staying on the phone while they’re placed so they can hear them go through.”
The DoJ is one of more than a dozen regulators looking into the $5.3 trillion-a-day currency market. Dealer banks are accused of trading ahead of clients and rigging benchmarks that some clients use to pay for FX transactions.
Deutsche Bank, Citigroup, Barclays and UBS do half of all the trading in the FX market. None have been accused of any wrongdoing.