$5-trillion a day forex market under lens

As a global probe into suspected manipulations in forex markets widen, some groups of traders have come under scanner for possible manoeuvering in rupee trades, which clock an average daily volume of over $50 billion globally.

These groups have been found to be using monikers like 'The Cartel', 'The Dream Team', 'The Bandits' Club' and 'The Club' on various online forums, instant messaging platforms like WhatsApp and BlackBerry Messenger and are suspected to be engaged in manipulation of numerous foreign exchange rates.

The manipulation is suspected to have spread across the world, including the developed markets like the US, the UK, Switzerland and Europe and Asian nations like India, Singapore, Hong Kong and Indonesia.

According to sources, regulators from across the world, including in India, are cooperating with each other in the probe into the worldwide forex markets, which, according to some estimates, clock trades worth $5.3 trillion a day.

This includes trades worth over $50 billion a day involving Indian rupee, although nearly half of these trades take place outside India and in markets like London, Singapore, Dubai, Switzerland, the UK, Hong Kong and the US.

The manipulations are suspected to have taken place in both spot market rates and the forward markets, although Indian regulators do not have any jurisdiction over rupee trades taking place outside the country.

Within India, RBI regulates spot forex markets, while currency derivatives market is regulated by Sebi.

Those suspected to be involved in possible manipulations include some forex traders, as also certain Swiss banks and other European financial institutions, while it is unlikely that any Indian bank or financial services firm might be directly involved, sources said.

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The issues being probed include possible cartelisation among banks, mostly from Switzerland and some other European countries, in manipulating foreign exchange rates, as also other manipulative practices adopted by forex traders.

In most likelihood, the possible manipulation in rupee trades might have taken place outside India, although the role of certain executives at Indian branches of suspected European banks might not be completely ruled out, they added.

The concerns about large NDF (Non Deliverable Forward) forex market trades in rupee outside India recently came to the fore after a sharp plunge in rupee value in recent months.

Rupee had slipped to a life-time low of 68.85 in August, although it has bounced back to near Rs 61 level now.

The NDF is a foreign exchange derivative instrument traded over-the-counter. It is operated in currencies that are not freely convertible such as the rupee. The market enables hedging of exchange rate risks, irrespective of any restrictions arising in the currency of origin.

The government officials and regulators in India recently held meetings with treasury heads of leading foreign banks, apparently as part of efforts to check the NDF market, where the rupee was being shorted aggressively.

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Flushed with cash, foreign entities have been suspected of exerting pressure on rupee in the overseas NDF markets.

According to BIS, the average daily foreign exchange market turnover in India stands at about $31 billion in 2013, which accounts for 0.5 per cent of the global turnover.

However, the daily turnover of rupee trades in global forex markets stands at about $53 billion (accounting for a one per cent global market share), which includes $50 billion worth trades in the rupee-US dollar transactions.

A huge volume of rupee trades outside India was already a problem area and the latest global regulatory probe into the possible forex market manipulations have now added to the concerns of the Indian regulators, a senior official said, while adding that they would extend all possible support to the global regulatory authorities.

Those looking into the matter mainly include Swiss Financial Market Supervisory Authority FINMA, UK's Financial Conduct Authority (FCA), as also other regulators in Europe and the US, while they are also approaching Indian regulators like Sebi and RBI for the worldwide probe.

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Besides the financial sector regulators, competition watchdogs in Switzerland and some other countries are also looking into the matter to probe any possible cartelisation among the banks to manipulate the foreign exchange markets.

The UK accounts for the largest share of 40.9 per cent in the global forex markets, followed by the US at 18.9 per cent, Singapore at 5.7 per cent, Japan at 5.6 per cent, Hong Kong at 4.1 per cent and Switzerland at 3.2 per cent.

While India's share is only 0.5 per cent, the rupee figures among the 20 most traded foreign currencies globally.

Separately, Indian market regulator, the Securities and Exchange Board of India (SEBI) is already looking into possible manipulations in currency derivatives, which are forward value contracts for pairs of two currencies including rupee and dollar.

It was suspected that brokers and traders were indulging in unauthorised trading of foreign exchange in the spot forex market. The issue was red-flagged to the Reserve Bank of India (RBI). While it is the RBI that mainly regulates the forex market, currency derivatives come under Sebi's jurisdictions and they are traded on stock exchanges.