“Many bankers continue to behave as they did prior to the financial crisis,” said Mark Williams, a finance professor at Boston University who wrote “Uncontrolled Risk,” a book on the rise and collapse of Lehman Brothers Holdings Inc. “Banks and their regulators have to cap bank risk-taking behavior before meaningful change can occur. This is a global problem and not isolated to a few big banks. It’s very troubling.”
Distortions are being found in areas of Wall Street that are beyond the scope of initiatives to rein in excesses such as those that led to the 2008 financial crisis. Spot foreign-exchange transactions, for example, fall outside the European Union’s Markets in Financial Instruments Directive, or Mifid, which requires dealers take all reasonable steps to protect client interests. They’re also exempt from the Dodd-Frank Act, which seeks to regulate derivatives in the U.S.
The U.K. Financial Conduct Authority, which oversees markets and prosecutes financial crime, is looking into possible manipulation in foreign exchange after being contacted by a money manager in March. The currency market, the biggest in the financial system, is one of the least regulated because transactions occur away from exchanges.
Distortions in foreign exchange markets have the potential to affect the buying power of consumers while manipulation of interest rate benchmarks could raise the price of homes, cars or any product purchased with borrowed money.
In the U.S., the Commodity Futures Trading Commission is reading through 1 million e-mails and instant messages from traders at the world’s largest 15 banks and broker ICAP Plc for evidence in the ISDAfix rate, which is used to value interest- rate swaps trades.
ICAP Chief Executive Officer Michael Spencer said last month that the company’s investigations have turned up no wrongdoing.
The $633 trillion over-the-counter derivatives market, which complicated efforts to resolve the financial crisis, is being regulated for the first time in its 30-year history by the Dodd-Frank Act in the U.S. and European Commission rules.
The probes into financial benchmarks began with Libor, which helps sets rates on securities, loans and even home mortgages. While UBS, Royal Bank of Scotland and Barclays have paid fines, that investigation by U.S. and U.K. regulators is ongoing.
“Regulators are frequently reactive, they are busy with business as usual, and do not go looking for possible violations unless something happens, such as the press calling attention,” said Jay Ritter, a finance professor at the University of Florida. “Once an issue gets raised in the court of public opinion, however, then regulators are alert for related activities that they otherwise wouldn’t be paying attention to.”
The European Commission said in May it was investigating Royal Dutch Shell Plc, BP Plc and Statoil ASA, three of Europe’s biggest oil explorers, over potential manipulation of Brent Crude, which helps set prices in the $3.4 trillion-a-year global oil market. Neste Oil Oyj, Finland’s only refiner, was asked to provide information regarding the probe.