Six Banks Fined $6 Billion Over Rigging of Forex Markets

Six of the world’s biggest banks will pay nearly $6 billion — bringing the total sums paid in connection with alleged forex manipulation to about $10 billion. These banks are also among the world’s biggest foreign-exchange traders. Five of them agreed to plead guilty to charges tied to a currency-rigging probe as they seek to wind down almost half a decade of enforcement actions. Separately, the Federal Reserve fined Bank of America Corp $205 million for unsound practices in foreign exchange. Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc agreed to plead guilty to conspiring to manipulate the price of US dollars and euros in settlements with the Department of Justice. UBS Group AG agreed to plead guilty to charges related to interest-rate manipulation. They were the first to cooperate with antitrust investigators and were granted immunity in the currency probe. Between December 2007 and January 2013, forex traders at Citi, JPMorgan, Barclays, RBS  and a few other big banks colluded by sharing proprietary information on pending client orders ahead of the 4 p.m. fix. This information sharing was allegedly done through instant-message groups – with catchy names such as “The Cartel,” “The Mafia,” and “The Bandits’ Club” – that were accessible only to a few senior traders at banks who are the most active in the forex market. The audacious nature of the dealing desks is revealed in the chatroom transcripts as one employee at Barclays remarks, […]

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CBI Tightens Rules on Buying US Dollars

Central Bank of Iraq is tightening access to US Dollars after demand ballooned amid suspicions some of the cash was being smuggled to Iran and Syria, both struggling with intensifying international sanctions. In February, the central bank asked dealers to submit cheques to identify currency buyers. From 2 April 2012, the rules were tightened further, requiring all commercial buyers of dollars at the central bank’s near-daily auctions to produce tax clearance certificate, previously applied only to orders of $50,000 and above, to show the “genuineness” of their need for dollars. From June 30, the Iraqi traders will have to submit papers to prove that they are allowed to import the goods into the country. Demand for greenbacks has doubled since November to about $300mn a day, putting pressure on the nation’s foreign reserves of about $60bn. The central bank also has an economic vested interest in holding daily dollar sales at $200mn or below, in order not to deplete the country’s foreign currency reserves. Currency dealers are expressing doubts over whether the regulations would work. However, some controls and regulations are must to avoid money laundering and financing of terrorist activities. Iraq still being primarily a cash based economy, the tracking the movement of cash is quite difficult. Reference Peel, M (2012). Iraq bank moves to allay laundering fears. Financial Times, 2 April.

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Is Euro at Fault for the Current Crisis?

One of the principal goals of Europe’s common currency – euro – has always been to promote greater financial market integration between member countries. It was hoped that the common currency would make it easier for investors in one euro country to find good investment opportunities in other euro countries since they would no longer have to worry about fickle exchange rates. The adoption of the euro as a common currency was designed also to cause large capital flows from the euro zone core to the periphery. Many believe it is those very capital flows that set the stage for the crisis. The problem is that such surges in capital flows depend on the perceptions and fancies of international investors, and therefore have a notorious tendency to come to a sudden stop if investor sentiment changes. The economic recession that began in 2008 sucked funds from the market and changed the risk perceptions of the investors. The investors started looking for safe havens in cash and treasuries of stronger economies. In the case of the euro zone, the sudden stop to capital flows in 2009 indiscriminately hit all of the periphery countries, regardless of how well they had managed their finances.

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Will SDR Be the Next Global Reserve Currency?

The recent crisis has brought home the complex challenges arising from the world having a single reserve currency. The economy of US is also making USD a volatile currency. BRICS countries in their recent Sanya summit, decided to drop USD as a currency for their bilateral trades and preferred their own currency as a substitute. In the search for alternative solutions, one option is to have a menu of alternative reserve currencies which fulfill the required criteria – full convertibility; the exchange rate determined by market fundamentals; a significant share in world trade; liquid, open and large financial markets in the currency issuing country; and also the policy credibility to inspire the confidence of potential investors. There is a debate on whether the SDR can be a reserve currency. In principle, it is desirable to develop a multi-currency system with several currencies operating as broad substitutes and reflecting changing economic weights and global realities. There have been recent efforts by the IMF to promote the use of SDR as a potential reserve asset for the evolving international monetary system. For the SDR to take on this significant role, several prerequisites have to be in place.The SDR has to be accepted as a liability of the IMF, it has to be automatically acceptable as a medium of payment in cross-border transactions, freely tradable and Its price has to be determined by forces of demand and supply. As the SDR, presently, does […]

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