According to latest evidence from the Bank for International Settlements, in April 2013 some £3.2 trillion ($5.3 trillion) of foreign exchange was traded daily on global foreign exchange (forex) markets. About 40% of forex dealing goes through trading rooms in London. This market is highly profitable for the UK economy. But all is not well with the way people trade. There is a scandal about rate fixing.

Exchange rates on the forex market are freely determined by demand and supply and fluctuate second by second, 24 hours a day, except for weekends. Nevertheless, once a day rates are fixed for certain trades. At 4pm GMT a set of reference rates is set for corporate customers by banks and other traders. The rates are set at the free market average over the one minute from 16:00 to 16:01. The allegation is that banks have been colluding, through text messaging and chat rooms, to manipulate the market over that one minute.

Since the early summer of 2013, the Financial Conduct Authority (FCA) in the UK, along with counterparts in the USA, Switzerland, Hong Kong and elsewhere, has been looking into these allegations. Last week (4/3/14), the Bank of England suspended a member of its staff as part of its own investigation into potential rigging of the foreign exchange market. The allegation is not that the staff member(s) were involved in the rigging but that they might have known about it.The Bank said that, “An oversight committee will lead further investigations into whether bank officials were involved in forex market manipulation or were aware of manipulation, or at least the potential for such manipulation.”

Meanwhile, the House of Commons Treasury Select Committee has been questioning Bank of England staff, including the governor, Mark Carney, about the scandal. Speaking to the Committee, Martin Wheatley, head of the FCA said that the investigation over rigging had been extended to 10 banks and that the allegations are every bit as bad as they have been with Libor.

Forex rigging ‘as serious as’ Libor scandal: Carney Yahoo News, Roland Jackson (11/2/14)
Forex manipulation: How it worked HITC (Here Is The City), Catherine Boyle (11/3/14)
Bank of England Chief Grilled Over Forex Scandal ABC News, Danica Kirka (11/3/14)
Carney Faces Grilling as Currency Scandal Snares BOE Bloomberg, Scott Hamilton and Suzi Ring (10/3/14)
UK financial body urges quick action over foreign exchange ‘fixing’ Reuters, Huw Jones (11/3/14)
Timeline -The FX “fixing” scandal Reuters, Jamie McGeever (11/3/14)
Forex in the spotlight Financial Times (16/2/14)
Forex scandal: What is that all about? BBC News (11/3/14)
Bank of England in shake-up after rate manipulation criticism BBC News (11/3/14)
Mark Carney faces Forex questions from MPs BBC News, Hugh Pym (11/3/14)
Bank of England’s Paul Fisher: ‘It’s not our job to go hunting for market wrongdoing’ Independent, Russell Lynch , Ben Chu (11/3/14)


  1. For what reasons would sterling appreciate against the dollar?
  2. Most of forex trading is for speculative purposes, rather than for financing trade or investment. Why is this and does it benefit international trade?
  3. If foreign exchange rates fluctuate, is it not a good thing that banks collude to agree the 4pm fixed rate? Explain.
  4. What was the Libor scandal? Why are some people arguing that the current forex scandal is worse?
  5. What can the FCA do to prevent collusion over exchange rates?

Every three years the Bank for International Settlements (the central bankers’ central bank) publishes a survey of foreign exchange market activity. The latest survey has just been published. Despite the banking crisis and subsequent recession, foreign exchange market turnover has increased by nearly 20% since 2007. The daily average value of currencies traded on the foreign exchange market is now $3.981 trillion. In 2007 it was $3.324 trillion and in 2001 it was just $1.239 trillion.

According to the BIS press release:

• The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.

• The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.

• As regards counterparties, the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” – a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (i.e. transactions between reporting dealers).

• Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.

• The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.

• The relative ranking of foreign exchange trading centres has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

The following articles look at some of the details of the report and consider their implications for London and for the global economy: an economy that has grown (in money terms) by 82% since 2001, while exports have grown by 101% and foreign currency transactions by 221%.

Giant FX market now $4 trillion gorilla Reuters (1/9/10)
Global currency trading jumps 20% in three years BBC News (1/9/10)
Daily foreign-exchange turnover hits $4 trillion Market Watch, William L. Watts (1/9/10)
Banks’ shift pushes FX trading to $4,000bn a day Financial Times, Peter Garnham and Jennifer Hughes (1/9/10)
Demonised ‘algos’ push the surge in FX trading Financial Times, Jennifer Hughes (1/9/10)
A valueless banking boom? BBC News Blogs: Peston’s Picks, Robert Peston (1/9/10)
Financial crisis boosts London’s dominance in global currency trading Telegraph (1/9/10)
BIS Triennial Survey of Foreign Exchange and Over-the-Counter Interest Rate Derivatives Markets in April 2010 – UK Data Bank of England News Release (1/9/10)

BIS documents
Press Release Bank for International Settlements (1/9/10)
Report “Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity in April 2010 – Preliminary global results – Turnover” Bank for International Settlements (1/9/10)
Statistical Tables Bank for International Settlements (1/9/10)
Link to previous reports Link from Bank of England site


  1. Why has the foreign exchange market grown so strongly (a) since 1998; (b) since 2007?
  2. How has the balance of the types of foreign exchange transactions changed since 2007? Explain why.
  3. What are the implications of this growth for the UK economy?
  4. What are the implications of this growth for the stability of exchange rates?
  5. What are ‘algos’ and what benefits (if any) do they bring to the foreign exchange market?
  6. What are the benefits and costs of the growth of foreign exchange carried out on behalf of financial (as opposed to non-financial) businesses?
  7. Where in a balance of payments account would the bulk of foreign exchange transactions be recorded?