Central banks are responsible for overseeing their nation’s monetary system and setting regulations to ensure its markets are balanced. Part of this includes setting foreign exchange and interest rate benchmarks and supervising trading worldwide.
In recent years, ‘risk-free’ benchmarks and the implementation of codes of conduct have made it more difficult to manipulate the FX and fixed-income markets; however, it is still possible. Due to the extensiveness and complexity of the markets, central banks need an automated surveillance solution, like Nasdaq Market Surveillance for Central Banks, to collect, store, and analyze the data to detect market abuse behaviors quickly, efficiently, and effectively.
A look back at FX and Fixed Income market manipulation
Pricing and issuance of numerous financial instruments rely on FX and interest rate benchmarks, and throughout the last decade, these markets have been hit by scandal. For example, in 2012, a group of commercial banks conspired to manipulate Libor in an effort to profit from trades or to affect the perception of creditworthiness, causing a waterfall of mispriced assets throughout the financial system.
In 2013, an FX scandal rocked the markets again. The FX fixed rate is based on observed transactions, so FX dealers at major banks schemed to profit and influence the fix itself.
Also, the International Organization of Securities Commissions (Iosco) and the European Union enacted measures to enhance the benchmark-settling process, improve transparency and prevent conflicts of interest. Additionally, the Foreign Exchange Working Group, in partnership with the Market Participants Group, published a code of conduct, the FX Global Code, with the main communication being no one should act on the market with the intention of manipulating it.
Due to the increased manipulation, regulators across the globe began to crack down on perpetrators. In 2014, regulators in the U.S., U.K. and Switzerland filed and settled charges against several major banks.
Why Financial Institutions Need Market Surveillance
With more diverse participants, new technologies and different platforms, the FX and Fixed-Income markets are more complex than ever. Although there have been efforts to improve transparency, such as the Trade Reporting and Compliance Engine (Trace) in the U.S. and new regulations and benchmarks worldwide, the growing complexity still leaves the market with a blind spot. It may be harder to manipulate, but it isn’t impossible.
Financial institutions, including central banks, need a sophisticated surveillance program, like Nasdaq Market Surveillance (NMS), to monitor activity and detect potentially nefarious behavior. NMS provides customers with high-quality data and displays it in a dashboard, making it easier to interpret and understand. Additionally, the system’s alerts detect unusual trading patterns against historical trends so users can identify manipulation and investigate if need be. Nasdaq Market Surveillance is crucial to detecting market abuse quickly and effectively, safeguarding the financial system and economy.