2013 — What could go wrong?
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On April 1, regulations began to change again in the UK (nope, it’s not an April Fools joke!). The UK Financial Services Act came into force, creating a new regulatory framework for financial services while abolishing the Financial Services Authority. The aim was a simple one; regulate financial firms providing services to consumers and maintain the integrity of the financial markets… And so, the FCA was born!
As the regulatory environment in the UK was enhanced and developed, shortcomings of the previous regulatory body began to wash ashore…
In June, Bloomberg News reported that currency dealers had been front running client orders and rigging the foreign exchange benchmark rates. As most traders will know, there is exceptional volatility in the forex market. When WM-Reuters calculate the fix rates for a particular currency, they look at a 30-second window before and after 16:00 London Time, to combat the difficulty in finding the benchmark rates! The fix rates are then based on the observed transactions in this window.
Currency dealers had been using this to their advantage, and were getting together and placing orders during the 30-second window. In now released WhatsApp group chats, the traders gave themselves names like ‘The Bandits Club’ or ‘The Cartel’ and worked together to rid the benchmark rates. In doing so, they created huge profit opportunities for their firms.
As time passed, regulators identified that some forex traders at five of the biggest banks had been manipulating the benchmark rates for several years, calling it “banging the close”.
In the aftermath, investors across the world lost confidence in the markets, and many called for structural reforms…
And, with those reforms, record-breaking settlements washed in. JPMorgan Chase had to pay the Department of Justice $13 billion (half of the bank’s annual profit) to settle a lawsuit! Goldman Sachs, Morgan Stanley and Bank of America were also hammered as the US Government took a hard stance against fraud going forward.
The year wasn’t over though, and further economic disruption was on the way! In October, the US Government shut down for 16 days, over the congressional budget standoff. The impact was huge. S&P estimated that the shutdown cost the USD economy $24billion, effectively taking 0.6% off the economic growth for the quarter in a mere 16 days!
2013 wasn’t a total year of doom and gloom though. The US and Iran reached a tentative deal to remove economic sanctions which has previously weighed heaving on Iran’s ability to export oil. As the two countries reached an agreement at the end of the year, the rial rose by 3.45% against the US dollar.
Ending on a lighter note, for Iran at least, 2013 paved the way for a true change in the regulatory stance of governments and regulatory bodies alike… Cue our next instalment — 2014 — in tomorrow’s episode of 10 years of Forex!
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