Mark Carney at the Centre of Currency Scandal

Mark Carney, the Governor of Bank of England will be facing a gruelling public testimony. This will be something that he hasn’t faced before as he readies himself to defend the morality of an institution that has become involved in the manipulation of currency scandal.

The lawmakers will be grilling Carney after the Bank of England terminated an employee. They had also released the minutes of meetings that showed certain officials knew the foreign exchange market was rigged almost eight years ago. However, the bank claimed last week that an internal review was conducted, and they didn’t find any proof that the staff were a part of this scam.

Carney’s Leadership Tested

This controversy comes as a major test in Carney’s leadership since the time he took over the Bank of England less than one year ago. That’s the time when he began bringing changes to the monetary policy, communications structure and regime. In fact, this is the second rigging scandal to affect the central bank. The first one was in 2012 when the central bank was embroiled in the offered rate manipulation of London interbank. The lawmakers immediately criticised the way Carney handled everything, and called it too naive.

Simon Hart, a lawyer at the RPC LLP in London was of the opinion that the statement that was released was only a minor issue that’s likely to develop into a bigger one. In fact, rather than answering all the questions, it answered a few and also left a lot more questions. Everyone noticed that the Bank was mum about what they knew regarding the other foreign exchange market participants.

Carney to be present at Hearings

Along with Paul Fisher, the Markets Director, Carney will appear before the Parliament’s cross-party Treasury Committee exactly at noon to answer questions on the central bank’s governance as well as on the infamous foreign-exchange inquiry. That session will be followed by two more hearings-Bank of England’s Inflation Report and Scottish independence and currency unions.

A member of the Labour Party of the Treasury Committee, Pat McFadden has commented that the Bank of England can not be its own judge and jury, and that Carney needs to bring someone in who’ll be truly independent in order to oversee the process. He also hinted that the committee is extremely concerned. He hoped that Carney is able to understand what is at stake when it comes to reputation.

This testimony comes at a time when regulators investigating the allegations that certain traders of the largest banks across the world came and worked together to rig the staggering $5.3 trillion per day foreign exchange market. The U.S. Securities and Exchange Commission or the USEC have been investigating whether certain traders distorted exchange-traded funds and prices for options by actually rigging the rates of the benchmark currency.

Drastic Steps Taken

Since the time Bloomberg reported in early July 2006 that certain traders may be involved in the currency scandal, over 20 traders were put on leave, suspended or even fired. They were from a variety of financial institutions including the three largest currency traders-Barclays Plc, Citigroup Inc. and Deutsche Bank AG. The report stated that these dealers shared such vital information about the client orders in order to manipulate the rates of the foreign exchange benchmarks.

No Decision Yet

In spite of the Bank of England employee being suspended, no action has been taken yet. The employee has not been named and is still being investigated. As per the minutes of the meeting that were released along with that statement, the officials at Bank of England were aware of the concerns that the foreign exchange market was being highly manipulated in July 2006. This was over seven years even before the regulators tried to open formal probes. The minutes have also shown that the officials at the bank were involved in discussions with the traders worries that certain currency benchmarks like Reuters/WM, 4:00 pm London were being grossly manipulated.

The FX benchmark such as Reuters/WM compute day-to-day value of the holdings and the ones given by the index providers. The smallest of the smallest movements can affect the value. Morningstar Inc. estimates it to be to the tune of $3.6 trillion in funds.

The 2nd Scandal

These allegations have dragged the Bank of England into yet one more market-rigging scandal. It’s not even been two years since the politicians criticised it for its failure to act on warnings. The central bank as such had no responsibilities to regulate the lenders in the UK at that time when they received authority in April 2013.

In fact, Carney was hired by George Osborne, the UK Chancellor to help in revamping the 3 century old institution post acquiring the new regulatory powers of the bank. He also helped bring in McKinsey & Co. as consultants in order to review the resources and strategy of the central bank. Additionally, he was also apt in introducing forward guidance. This was as part of pledge that stated the interest rates would be maintained at a record low.

Hence, in October, Carney came back with the currency manipulation claims by commanding a ‘full inquiry’ of the internal records. The review that covered more than 15,000 emails, 40 hours of recorded telephone conversations, and 21,000 Reuters and Bloomberg chat records failed to reveal any proof that any of its employees were even involved. Until date, no evidence has been found or brought forward.

Even though Carney will face a lot of questions on how much the Bank of England officials actually knew about any kind of manipulation or whether any concerns were even raised or escalated, Hart from RPC is of the opinion that he may not be able to share any insight into the ongoing investigations.