Monday, October 7, 2013


For bloggers anyway.  There's no competing with the Washington follies, so I thought I might just on a few things floating around out there.

The WSJ had an interesting story the other day that prompted more than a few phone call regard the Swiss investigating alleged hanky-panky regarding the "fixes" which are used to establish the rates for various currencies in the foreign exchange market.

Now the fixes can occur at various times in the day but the big one is a 1600 London time as it is the most often used fix to determine the value of a trading portfolio OR of foreign assets for scores of multinational companies.  Now as regular readers know I have been hardly impressed with the so-called LIBOR rate fixing scandal, so a couple of buddies called in to ask whether my view was the same in regard to this latest misstep on the part of the industry (by the by, has anyone noticed that UBS is always mentioned when one of these things goes down)?  My answer; not by a long shot.

Now all I know is what I read in the papers but this is considerably different from what we have seen before in the sense that LIBOR, since it's inception was never thought of nor expected to be an actually state of the market trading rate that you cold post on your machines and do business at the price.  It was a notional rate dreamed up to accommodate syndicated leading where multiple banks fund advances at a single rate at one time during a business day.  That rate was set in London at 1100a.m. and defined as a rate, "at which first class banks would lend to each other in the London market.  "What was a "first class bank?"  Put it this way: when this got started around 1970, it wasn't Japanese.  Probably wasn't French either although the French didn't agree...then again, the French rarely agree with anyone which is what makes them French.  So, if a bank wished to borrow from a bank it was at the lender's rate, not LIBOR.  It was a rate of convenience, not of a market.  And the entire world knew it.  If the rate was a bit high for the next three months. it could be a bit low for the following three months.  Whatever.  Fudging an internal position is another thing but if your controls are in place and good and the watch dogs are watching this sort of thing should be picked up.  The malfeasance tends to be internal, not with clients.

This situation is considerably different.  The set is the market.  A trader could believe that the set was the last trade.  OK, what's the difference?  For an institution that is a big player, J.P Morgan, Citibank, UBS--and FX is a $5 trillion market a day and dealing with huge customer orders, one or two basis points per trade are enormous.  If Sterling, for example is 1.6096 middle and you are long at 1.6088, there's a fortune to be made my son.  The manner in which a situation like this comes about is the subject of this investigation.  It will be interesting.  So much for a dead Monday.

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