Bank of Canada examining way its reference rate for Canadian dollar is set as pressure builds worldwide to prevent alleged manipulation of benchmark currency rates; procedures to set most currency benchmarks are susceptible to manipulation, bank says

March 14, 2014 () – The Bank of Canada said in an internal report that it’s examining the way its own reference rate for the Canadian dollar is set as pressure builds globally to prevent alleged manipulation of benchmark currency rates.

The methodology used to set most currency benchmarks, including the noon rate for the Canadian dollar, leaves foreign- exchange markets open to manipulation, according to documents obtained by Bloomberg News under the nation’s Access to Information law. The Bank of Canada said it views possible collusion between dealers as a “serious concern” and has produced at least three studies on its own reference rates since the allegations involving London-based traders were first reported by Bloomberg News in June.

A dozen authorities on three continents are investigating claims of manipulation as policy makers and the private sector look for ways to reform currency benchmarks. The Bank of England suspended one employee last week and Governor Mark Carney was questioned by lawmakers after documents showed concerns over manipulation were raised as early as 2006.

“If banks are colluding with information about their overall fix positions then this is a serious concern,” said an Oct. 25, 2013, Bank of Canada report titled “Reform of Financial Reference Rates and Potential Implications for FX Benchmarks.”

Under a section called “Scope for Manipulation” the report notes the procedures used to set most currency benchmarks are susceptible to manipulation. The most recent report was dated Jan. 10.

‘Actively Involved’

“The Bank of Canada takes this issue very seriously, and because of the importance of financial benchmarks to the global economy and financial system stability, the bank is actively involved in the efforts of authorities around the world to ensure their robustness and credibility,” Dale Alexander, a spokeswoman at the central bank, said in an e-mail yesterday from Ottawa. “It is important to note that the Bank has no evidence of foreign-exchange market manipulation in Canada.”

The central bank is working with the Financial Stability Board in its efforts to reform financial benchmarks, including foreign exchange benchmarks, Alexander said.

The documents obtained by Bloomberg News were meant to provide general context on the issue of foreign-exchange fixes, she said.

The Bank of England’s Carney, who left his job as Canada’s central bank chief in June, told a U.K. parliamentary committee this week he suspended an employee for failing to escalate the issue of currency manipulation after records seemed to show senior currency dealers discussed with central bank officials concerns that the market was being manipulated as early as 2006.

International Reviews

The Federal Reserve Bank of New York in 2012 examined how benchmark currency rates were calculated after accusations emerged that banks manipulated the London interbank offered rate, Andrea Priest, a spokeswoman for the New York Fed, said in an e-mailed statement March 12. The New York Fed-sponsored Foreign Exchange Committee “undertook an effort to catalogue existing rates. This effort did not reflect concerns specific to the FX rate.”

The Hong Kong Monetary Authority said today that UBS AG traders tried to rig the city’s benchmark interest rate between 2006 and 2009. While the requests had a “negligible impact” on fixings and no fines will be imposed, the regulator asked UBS to take disciplinary action against the employees responsible.

WM/Reuters Rates

The most used benchmarks for 160 currencies are the WM/Reuters Rates, which help set the value for what Morningstar Inc. estimates is $3.6 trillion in funds, and are determined by trades executed in a minute-long period called “the fix,” starting 30 second before 4 p.m. in London.

Fund managers often ask currency dealers to change their money during that fix window to ensure the exchange rate they receive matches the benchmark.

Regulators are investigating allegations traders at some of the world’s largest banks shared information about client orders to manipulate the WM/Reuters rates in their favor, five current and former dealers with knowledge of the practice told Bloomberg News in June.

The Bank of Canada uses a similar method, averaging trades over a two-minute window around noon, to determine its reference rate for the value of the Canadian dollar versus its U.S. counterpart. The rate is published on the bank’s website. The central bank says on the website the rate is for informational purposes only, though some firms use it as a benchmark.

Reference Rate

“Potentially the only way to prevent the large volumes of trading at the fix would be to impose restrictions on client orders at the fix,” the Oct. 25 Bank of Canada report said.

The WM/Reuters Rate is collected and distributed by World Markets Co., a unit of Boston-based State Street Corp., and Thomson Reuters Corp. The Bank of Canada uses prices from the Reuters trading platform to determine its noon rate.

Bloomberg LP, the parent of Bloomberg News, competes with Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg offers its own benchmark currency rate fixings.

The other two reports obtained by Bloomberg News, dated Jan. 10, 2014 and Nov. 6, 2013 are both titled “Bank of Canada Foreign Exchange Reference Rates,” and the majority of the information in both is redacted.

To contact the reporter on this story: Ari Altstedter in Toronto at To contact the editors responsible for this story: Dave Liedtka at Robert Burgess

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