Criminal convictions for Foreign Exchange trading

Tough criminal sanctions and robust regulations are being introduced to stop unscrupulous traders giving misleading statements on Foreign Exchange benchmarks.

Draft legislation to regulate the Foreign Exchange closing spot rate has already been published and implementation is imminent.

The government plans to make the Foreign Exchange closing spot rate a ‘relevant benchmark’ that will be subject to criminal proceedings from 31 December, and a ‘specified benchmark’ regulated by the Financial Conduct Authority (FCA) in April 2015.

This is important as Foreign Exchange benchmark rates establish the relative values of currencies, reflecting the rates at which one is exchanged for another.

They are used by many investors for a range of everyday transactions, such as pricing of Foreign Exchange swaps, cross-currency swaps, spot transactions, forwards, options, futures, and other similar derivatives.

The reforms are very welcome because manipulation of Foreign Exchange benchmark rates threatens the effectiveness of these transactions as well as undermining confidence in the trading markets.

An official investigation into Libor (the London interbank offered rate) revealed manipulation of the widely used benchmark and resulted in heavy fines for a number of banks. The upshot was that Libor became regulated under the Financial Services Act 2012, prompting calls for other benchmarks to receive similar treatment.

As a result, a joint publication by the Bank of England, Treasury and the FCA recommended that manipulating the closing spot rate benchmark should become a criminal offence.

The publication also called for Foreign Exchange trading using this benchmark to become an FCA-regulated activity. This means Foreign Exchange traders must be FCA-approved and will be subject to the regulator’s full range of disciplinary sanctions under the Financial Services & Markets Act 2000 (FSMA).

Because Foreign Exchange trading is not currently a regulated activity, traders do not need FCA approval. However, this will change very soon.

For more information on this matter, or any other legal issues involving regulatory bodies, please contact David Edwards on 01772 258321 or David.Edwards@harrison-drury.com