FX market ‘manipulation’ probed
FX market ‘manipulation’ probed
The discovery widens a global lending rate scandal into new markets, as fallout from the Libor case puts banks under added scrutiny and spurs both regulators and institutions to reconsider how certain key interest and currency rates are set.
The probes found evidence showing that traders from several banks communicated with each other over electronic messaging about what rates they were going to submit for the local banking association's fixings for non-deliverable foreign exchange forwards (NDFs), aiming to benefit their trading books.
"Traders were talking to traders, saying: “I need you to help me today, I need to fix low,'" said the bank source, who asked not to be identified due to the confidential nature of the reviews.
NDFs are derivatives that let companies and investors hedge or speculate on emerging market currencies when exchange controls make it difficult for foreigners to participate directly in the spot market.
The contracts are settled in dollars, so there is no exchange of the underlying currency, but they can affect spot exchange rates.
The Monetary Authority of Singapore ordered banks that help set local interbank lending rates and NDF rates to review the fixing process last year as US and British regulators cracked down on manipulation of the London interbank offered rate (LIBOR), a benchmark used to set interest rates for around $ 600 trillion worth of securities.
The investigations into Libor led to fines of $ 1.5 billion for UBS AG and $ 451 million for Barclays PLC for rate rigging. Regulatory probes stemming from the LIBOR cases in the United States and Britain have also revealed evidence of attempted manipulation of benchmark interbank lending rates in Tokyo, Hong Kong and Australia.
Banking watchdogs in Britain and elsewhere in Europe have begun trying to reform the way LIBOR and other interbank rates are set, to try to ensure the numbers can't be manipulated.
The Singapore bank probes show that the focus is now turning to other benchmarks, amid concern that they too were manipulated.
The biggest banks in the Asian NDF markets include UBS, JPMorgan Chase & Co., DBS Group Holdings Ltd. and HSBC Holdings Plc.
The source did not make specific comments about possible wrongdoing by individual banks or traders and Reuters has no independent evidence of such wrongdoing.
UBS, JPMorgan, DBS and HSBC declined to comment. Reuters also contacted the other 14 banks involved in setting NDF rates. Twelve said they had no comment while two did not respond to repeated telephone and e-mail requests for comment.
Under the NDF rate-setting process, organized by the Association of Banks in Singapore (ABS), banks submit their reading of the spot price for the Indonesian rupiah, Malaysian ringgit and Vietnamese dong every working day at 11:00 a.m. (0300 GMT).
A settlement rate for NDF contracts due to expire is then calculated by taking the average of the submissions, excluding the highest and lowest quarters of contributions from the banks.
While the exclusion of the rates at the top and the bottom of the range is meant to ensure that one bank cannot try to improperly skew the rate, the concern is that collusion by traders at multiple banks could influence the result.
There are 18 banks on the panel for the rupiah, 15 for the ringgit and 12 for the dong.
The Monetary Authority of Singapore told banks in the city state last July to review the way they set interbank lending rates, in the wake of the LIBOR scandal.
As bank officials pored over documents and communications, they came across evidence that raised alarm bells over activities in the NDF markets as well, spurring an extension of the reviews to those markets in September, the source said.
In Singapore, benchmark rates for both interbank lending and certain NDFs are set by panels of banks organized by the ABS. Thomson Reuters, parent company of Reuters News, calculates and distributes the spot reference rates for the rupiah, ringgit and dong NDF markets on behalf of the ABS, as well as other interbank lending and currency rates.
"Thomson Reuters supports any measures that create more robust benchmarks for the market and we fully cooperate with regulators, authorities and benchmark sponsors' investigations as required," a Thomson Reuters spokeswoman said.
In December, the Monetary Authority of Singapore issued a statement setting out the banks' obligations under the reviews, although it has not made clear whether it would take action of its own based on the results.
"The banks have to immediately report any irregularities they uncover to MAS, and have to take appropriate disciplinary action against staff involved in such irregularities," the statement said.
"The reviews are ongoing, and it is premature to speculate on the outcome of these reviews at this stage."
The central bank provided no further comment when asked by Reuters about the probes' findings.
The source said most banks had submitted their reviews to the authorities at the end of last year but did not say what disciplinary actions if any were planned for banks or traders who tried to manipulate rates.
The MAS said last year that it was working with the ABS to review the way NDF rates and the city state's benchmark lending rates are set. The association declined to comment for this story.
Banks dealing in over-the-counter products in Singapore such as NDFs follow a code-of-conduct set by the Singapore Foreign Exchange Market Committee, known as The Blue Book.
That includes a requirement that: "dealers and brokers shall not engage in manipulative or deceptive conduct or any form of conduct which would give other users of the market a false or misleading impression as to prevailing market conditions."
Trading volumes in the NDF markets are much smaller than for derivatives linked to Libor, although they are hefty enough to effect spot rates for the underlying emerging market currencies.
For the Indonesian rupiah, the biggest market fixed in Singapore, daily turnover is estimated between $ 700 million and $ 1.3 billion, according to an HSBC report. Since NDFs are traded over the counter, there is no fixed data on volumes.
Traders say even a small movement in an NDF fixing could have a big impact on a bank's trading book if it had a large number of contracts expiring.
Many of the traders involved were junior and did not appear to think they were doing anything wrong, said the source.
The NDF market in Singapore developed after the Asian financial crisis, when capital fled the region causing several area currencies including the rupiah to slump in value. NDFs gave banks a way around controls that governments subsequently imposed on their currencies to curb those capital flows.
Of the 40 to 50 NDF traders based in Singapore, roughly half had either been put on leave, including those suspended while their activities in the market were under investigation, or left their jobs during the Singapore probes, the source said. It was not clear how many may have been or will be reinstated after the probes' completion.
"A lot of banks are stuck, traders are suspended or have left, so the market is seeing around half its usual volume," the source said.
Flows in Indonesian rupiah and Malaysian ringgit NDFs have been thin since the last quarter of 2012 according to Thomson Reuters IFR Markets, although volumes in ringgit NDFs picked up at the start of this year.
The action by US authorities last month against UBS for its part in the Libor scandal included a criminal charge against the Swiss bank's Japanese subsidiary for yen LIBOR manipulation.
The charge sheet by the Commodities Futures Trading Commission against the bank also revealed other markets in Asia where problems emerged.
"Through its internal investigation, UBS identified evidence of similar misconduct involving submissions for at least the Hong Kong Interbank Offered Rate ("HIBOR"), the Singapore Interbank Offered Rate ("SIBOR"), the Singapore Swap Offer Rate ("SOR") and the Australian Bank Bill Swap Rate ("BBSW")," a footnote in the charge sheet read.
The Hong Kong Monetary Authority said in December that it was looking into the findings on Hibor.
The Australian Securities and Investments Commission declined to comment on the BBSW.
Telegram Russia ban spurs privacy debate
- Telegram has always attracted a mix of criticism and respect for its use of encryption to ensure its messages between users remain confidential.
- A Moscow court decided last week to block the app in Russia because it refused to hand over encryption keys to authorities.
LONDON: Telegram, the messaging app that re-located from Russia to Dubai, has again fallen foul of the authorities in its mother country. So what is it about the social media platform that simultaneously has governments worldwide so concerned and freedom of speech advocates so agitated?
Telegram has always attracted a mix of criticism and respect for its use of encryption to ensure its messages between users remain confidential.
A Moscow court decided last week to block the app in Russia because it refused to hand over encryption keys to authorities — sparking fresh controversy around the app, which has previously been banned in countries such as Iran, Afghanistan and Indonesia.
Telegram has been under close scrutiny in Russia since legislation was passed in mid-2016 that required communication companies to hand over encryption keys to the Federal Security Service (FSB), if requested.
There was also a move to place companies on a “register of information distributors,” which requires firms to store user online communications for a set period of time and hand over data to the authorities when needed.
Some of Russia’s large social networks are reportedly on the register and Telegram was pressurized to register in mid-2017. Other Western social media companies such as WhatsApp are not listed. WhatsApp did not immediately respond to a request for comment.
Weeks after joining the register, Telegram refused to agree to FSB requests for encryption keys, resulting in the Russian media watchdog Roskomnadzor seeking court approval this month to block the app.
On the day of the court decision, Telegram’s founder Pavel Durov tweeted: “Privacy is not for sale, and human rights should not be compromised out of fear or greed.” The company has also said it is technically impossible to transfer encryption keys.
It was not the Russian entrepreneur Durov’s first run-in with Russian authorities. Telegram — which was launched in 2013 — originally had its development team based in St. Petersburg, but had to leave the country due to local IT regulations. It is currently based in Dubai.
The messaging app prides itself in being the most secure and independent form of instant messaging that respects the need for privacy. Its “secret chats” option makes use of end-to-end encryption that ensures only users can read them. Messages cannot be forwarded and you can order messages to “self-destruct” within a set amount of time. It can also alert users if the recipient of the message takes a screenshot of the correspondence. So-called Telegram “Channels” can be used to broadcast public messages to a large audiences.
While WhatsApp — which is owned by Facebook — also provides end-to-end encryption, Telegram differentiates itself with claims it is faster and more secure.
Damir Gainutdinov is a legal analyst at Russian human rights group Agora, which represented Telegram in court. He has headed up its project on the defense of online freedom in Russia since 2010.
He told Arab News that the block placed on Russia was more of a power-play by the authorities.
“I think that Russian authorities believe that Telegram is a threat because they cannot control it.
“But I wouldn’t say that it is really the biggest threat. The attack on Telegram is more about showing that they can block any global service if they want,” he said.
Russia’s government has argued that the app helps to enable terrorist attacks in the country, saying that access to encrypted messages is a national security issue.
The FSB said a suicide bomber who killed 15 people on a St. Petersburg subway in April last year had used Telegram to plan the attack.
Voices from outside Russia have also criticized Telegram for not doing enough to clamp down on terrorists using the app. “Terrorists and extremist groups such as ISIS (Daesh) use encrypted applications like Telegram because it allows them to recruit new members, fundraise, incite to violence, and even coordinate terrorist activity without the threat of being discovered,” said executive director David Ibsen at the US-based non-government organization Counter-Extremism Project.
“ISIS also created public channels on Telegram to broadcast pro-ISIS news updates and disseminate other propaganda materials,” he told Arab News. Durov has been quoted as saying at a conference in 2015 that the right to privacy is more important to the company than “our fear of bad things happening, like terrorism.” Following the Paris attacks in 2015, Telegram did revise its policy on its public channels, but it has refused to take down private Daesh chats, according to Ibsen.
Social media sites are coming under increasing pressure from authorities worldwide to do more to limit the promotion of extremism online.
In a statement to Arab News, Twitter said it had permanently suspended 274,460 sites in the second half of last year — down more than 8 percent on the previous reporting period.
While Telegram is far from the only social media app to be criticized for its counter-terrorism policies, it is seen by some as the more reluctant player in the battle against online extremism. “Social media companies remove content regularly that violates their stated terms of service, and some of this includes extremist and terrorist videos, images and other propaganda,” said Ibsen. “However, despite the availability of technology that can identify and permanently prevent prohibited materials from being re-uploaded, the biggest social media platforms are not taking this vitally important step,” he said.
“Telegram has become a refuge app from the moment the preferred apps (Twitter in particular) started to clamp down on extremist content,” said Rik Coolsaet, a professor of international relations at Ghent University in Belgium who has written extensively on counter-terrorism efforts. “Its encryption offered a secure environment for terrorist recruiters and groomers, but at the same time limited their propaganda outreach, since it is more difficult to access. For that reason, Twitter remains their preferred app,” he added.
Russia is not the only country clamping down on Telegram. Iran restricted certain channels in December last year during the protests and there have been recent threats that restrictions could be reimposed. A estimated 40 million Iranians use Telegram’s channels and messaging services.
“In the case of Russia and Iran, the Telegram crackdown has much more to do with controlling the lives of its citizens than it does with preventing terrorist activity,” said Ibsen.
Telegram did not respond to Arab News’ request for comment.
We talk to leading world cyber terrorism expert Chris Sampson, co-author of “Hacking ISIS: How to Destroy the Cyber Jihad” and an analyst with the Terror Asymmetrics Project
Why are governments so worried about Telegram?
Telegram was launched as an encrypted messaging app. This meant that government agencies were less likely to be able to intercept messages passing across the Internet and read private conversations. However, in September 2015, Telegram also created an option for channels, which act like chat groups. This allowed like-minded individuals to essentially host a chat room. Unless the channel was set to public you couldn’t read what was discussed without being given an invitation link. Groups like ISIS began using these channels to share propaganda and information. Other groups use Telegram in much the same manner. Non-violent resistance groups around the world would also use the messaging app and channels to communicate so authorities in the countries they fear would be less likely to intercept their discussions.
Will clamping down on social media apps be effective?
As governments crack down and ban apps, others will rise and replace them with new features and focus on security from outside eyes. They will operate either within the legal construct or outside of it depending on the countries they seek to circumvent. Since laws around the world differ dramatically, what is legal in one country could be illegal in another. We’ve seen this already happen as countries sought to ban use of Telegram, WhatsApp or even Twitter. Inevitably the access to the technology remains the same and users find a way to use both encrypted messaging and social media platforms.
Does Russia’s action set a precedent?
Countries such as Indonesia, Iran, Afghanistan and others have banned Telegram. Brazil banned WhatsApp around the timing of the World Cup only to lift the ban. Such bans are largely ineffective because the majority of users are engaged in lawful communications yet want their privacy, those engaged in illegal and potentially violent activities make up a fraction of the userbase. The better solution is to know where nefarious users are lurking on the web and keep track of them in observable spaces. Banning the public’s access to messaging apps will always fail. Telegram and similar companies should deny government agencies the keys to encryption unless there is a reason given that would justify unlocking communications. If the governments are able to seize a phone and unlock it, they’ll already have access to a suspect’s communication if they haven’t erased the data.