German watchdog sees disturbing evidence in forex probe

By Thomas Atkins and Jonathan Gould

FRANKFURT (Reuters) - Germany's financial watchdog has discovered clear evidence that market participants attempted to manipulate reference currency rates, widening the probe to include many more banks and saying international investigations into the matter were far from over.

Regulators globally are looking at traders' behaviour on key benchmarks, spanning interest rates, foreign exchange and commodities. Eight financial firms have been fined billions of dollars for manipulating reference interest rates, and the probe into the largely unregulated $5.3 trillion-a-day (3.14 trillion pounds) foreign exchange market could prove even costlier.

Watchdog Bafin's head of banking supervision Raimund Roeseler said discoveries in the forex probe were worrying and it was "much, much bigger" than the investigation into benchmark interest rates, such as Libor, that has dogged banks for years.

"There were clearly attempts to manipulate prices, that’s what was disturbing," Roeseler said on Tuesday at the regulator's annual news conference. Market participants had attempted to manipulate daily fixing rates for a number of different currencies, he said without specifying what evidence had been gleaned.

"It’s not the really big currencies, not the dollar/euro, but several currencies were involved,” he said, noting the Mexican peso was one of the currencies involved.

More than 30 foreign exchange traders at many of the world's biggest banks have already been put on leave, suspended or fired as forex probes in various countries expand.

However Roeseler's comments stand in contrast to what the Financial Conduct Authority (FCA) said in late April, that it had yet to determine whether misconduct had occurred in the forex market.

Elsewhere European Competition Commissioner Joaquin Almunia told a news conference regulators had yet to decide on the next step of the investigation into suspected rigging of forex rates. "We are not yet at this moment when I can announce steps of this case," he said.

Roeseler said all German banks with forex trading activities have been asked to conduct internal probes and to submit their findings to Bafin, indicating the investigation had taken a wider dimension that previously known.

"This is a subject that is going to be with us for a long time ... we’re not going to be done in 2014 but hopefully before 2018," Roeseler said.

CLEAR EVIDENCE

Benchmark foreign exchange rates, often referred to as fixes, are essential to global financial markets and are used to price trillions of dollars worth of investments and deals. They are compiled using data from Thomson Reuters and other providers and are calculated by WM Company, a unit of State Street Corp.

Deutsche Bank AG, Germany's largest bank and the world's largest forex trader, is the country's only bank known so far to be involved in the currency probe. The bank has said it is conducting its own internal probe and is cooperating with authorities.

Roeseler said he expected to conclude an investigation into the manipulation of reference interest rates during the summer. Bafin will hand over responsibilities for supervising Germany's top 24 banks to the European Central Bank (ECB) in November.

The regulator had clear evidence that there were efforts to manipulate reference interest rates, but it remained unclear whether those efforts were successful.

"We have some evidence of people trying to move the market in one direction and they succeeded in doing precisely the opposite," he said. "They shot themselves in the foot."

In separate comments about banking stress-test scenarios being prepared by the ECB and the European Banking Authority, Bafin President Elke Koenig said these would prove demanding for some of the 24 participating German banks.

But the ECB's balance-sheet health check was unlikely to yield big shocks for banks, she said.

"The base-case scenario in the stress tests shouldn't yield any negative surprises," Koenig said. "I cannot rule out, however, that the adverse stress scenarios will prove very demanding for some banks."

Deutsche Bank on Sunday unveiled plans for an 8 billion euro (6.5 billion pounds) share issue designed in part to strengthen its balance sheet ahead of the stress tests, expected to conclude in October. Roeseler said Bafin did not put any pressure on the bank to carry out that capital increase.

The bank health checks are being led by the ECB before it becomes the top banking regulator in the euro zone in November. Many of the 128 participating banks have been reducing risky assets and increasing regulatory capital ahead of the exam.

In January, Koenig warned that some participating German banks may face a capital shortfall in the stress tests.

(Editing by David Holmes)