* Currency traders suspended, fired amid FX rate rigging probe
* Banks reluctant to hire lest replacements also tainted
* Forex a major source of income already under regulatory pressure
* Suitable staff already scarce as automated trade thins talent pool

By Patrick Graham and Clare Hutchison

LONDON, Feb 21 (Reuters) - A void is appearing in the upper reaches of the world's biggest and most powerful financial market as banks struggle to replace currency traders suspended or fired during a global investigation into allegations of foreign exchange rate-rigging.
Recruitment firms and sources at some of the banks at the centre of the probe say there is huge reluctance to hire externally because replacements could be tainted by allegations of collusion themselves.
That leaves managers with the choice of promoting more junior staff into powerful chief and senior dealer positions or appointing staff from other units of the bank who are less familiar with the daily workings of the $5.3-trillion-a-day forex market.

While the hiatus may be temporary as the investigation unfolds, it comes at a time when machine-driven algorithmic models have already replaced around two thirds of the spot FX dealers operating in London a decade ago, and there are growing concerns about staffing numbers in the industry.

The financial impact for the banks remains unclear, but it adds pressure on a major source of income that is already suffering from a wave of regulations clamping down on the amount of risk dealers can take.
With prospective bans on proprietary trading spelling a change in how lenders do business, the fallout from the scandal further clouds the outlook for many department managers.
"Certainly it might only be 20 people so far who have been suspended, but it has created one hell of a cloud above the industry," said one well-known headhunter in London, who also declined to be named.
"We have had calls from people who haven't been in the market for a while who think there might be opportunities for them. But I think it's very difficult. Until more decisions are made, there is going to be a little bit of a stand-off."
Regulatory authorities are looking at whether traders at some of the world's biggest banks colluded to manipulate benchmark foreign-exchange rates used to set the value of trillions of dollars of investments.
Banks have taken action against 21 traders, and financial institutions including Royal Bank of Scotland, Deutsche Bank and UBS are now said to be reviewing the rules governing how traders make bets with their own money.

All of the banks who have taken action against traders since the start of the probe declined to comment or had no immediate comment on the resulting recruitment and operational issues.
LONG PROBE
Among other things, industry players say investigators will have to trawl through millions of chatroom conversations and other correspondence for dozens of traders, potentially including some who have since moved on to other jobs.

The head of Britain's FCA financial sector overseer has said its probe is likely to drag on into next year, leaving the banks nervous about hiring anyone with a history of trading at a major institution.
"This is not any sort of downsizing, so all these people will need to be replaced," said a senior manager in foreign exchange at one bank in London, who asked not to be named.
"But banks will need to be extra careful when they look at candidates' history, whether it is internally or externally. Certainly if you are a bank and you want to hire a high flier from another bank, you have to think twice."

The headhunter said banks' other practical problem for the moment is that most of the disciplinary action so far has been in the form of suspensions rather than outright dismissals.
"If you are a big bank who has someone suspended at this time, until a definitive decision is made it's very difficult to go out and hire people purely to fill in a space for someone who is only suspended," he said.
"We can all hazard a guess as to what is going to happen to anyone who is suspended, but we don't know."
A handful of top banks control the multi-trillion-dollar market tied to the benchmark exchange rates. The top five FX dealing banks see around half of the forex market's average daily flow, and the top 10 banks account for almost 80 percent.

DIFFERENT SKILLS
London-based recruiters say the spot FX market in major currencies in the city adds up to around 125-150 dealers at 25 banks - as little as a third of its size a decade ago.
"Electronic solutions are coming in and doing the job that people used to do. The banks also are not taking the same amount of risk, so there is less of a requirement for people, and increasingly it's a different skill set," the headhunter said.

"Banks more and more are just offering an execution service to clients. The rules on (limiting or banning) proprietary risk-taking are making the banks into a different model now which can require a different kind of trader."

A separate investigation last year into rate rigging in another major centre, Singapore, found 133 traders tried to manipulate lending and foreign exchange reference rates, many of whom banks have struggled to replace.
Adriana Swift, Head of Capital Market Sales and Trading at financial recruitment firm Selby Jennings, said those involved would find it hard to move into other parts of the business and will often be forced to change career, unless they are at a junior level and formally cleared of any wrongdoing.
"People generally don't want to hire FX dealers for sales and trading roles in other asset classes because they want people with experience in the sector they're hiring into," she said.

South Korea's financial regulator said on Thursday it plans to establish a 20-year government bond futures market by 2015 to boost derivatives trading activity and offer investors' more hedging options.
The Financial Services Commission (FSC), in an annual report to the president, said a greater variety of derivatives products will offer investors the ability to properly manage their investment risks.

This measure comes as the South Korean government seeks to increase the proportion of longer-term debt to reduce potential refinancing risks and meet demand from institutional investors for such products. A futures contract for longer-tenored debt would help investors cope with risks associated with the less liquid paper.

The FSC also said it will closely monitor a recent spike in yuan-denominated deposits and any similar trends involving other foreign currencies for potential risks.

Yuan deposits by South Korean residents jumped nearly nine-fold between September to January as investors searching for higher yields invested in short-term, asset-backed commercial paper that results in simulated yuan deposits in local branches of Chinese banks via currency swaps.

Bank of Korea Governor Kim Choong-soo said last week that the spike in yuan deposits was not a major cause for concern, and policymakers have so far ruled out any change in regulation to curb the yuan deposit growth.

Finally, the FSC said it plans to announce additional measures to manage household debt conditions by end-February. Though it did not disclose specifics, new measures will add to existing debt restructuring efforts such as boosting the amount of longer-term and amortising home mortgages to push borrowers towards more financially sound loans. (Reporting by Se Young Lee; Editing by Kim Coghill)

“Give me control over a nation’s currency and I care not who makes its laws.”
- Baron Mayer Amschel Rothschild, European Central Banker

 Why would we allow the Federal Reserve to have complete control of our currency, when it has already collapsed the value of the dollar by more than 96%?

The value of your money, interest rates for loans, availability of jobs, and the rate of home foreclosures are all decided by a small group of elite private bankers who run the Federal Reserve. Contrary to common belief, the Federal Reserve – the Central Bank in the U.S. – is not a government agency. It’s privately owned and operated.



The directors and shareholders make important decisions about the economy behind closed doors without government or citizen oversight. What’s the result? A currency that is worth less every day; a rigged and volatile market with extreme highs and lows; home foreclosures; and a privileged class of bankers who make decisions to benefit themselves at the expense of others. Private bankers have a tremendous amount of control not only over the economy, but the government and society as a whole. Here’s how:


Banks create money out of thin air – Most people have to work hard to earn their money, but the Federal Reserve and its member banks can create money whenever they want. Banks simply spend money into existence. When the Federal Reserve buys government securities, for example, it simply credits the seller’s account with money that didn’t exist beforehand. This new money is then loaned and re-deposited at banks until it becomes 10 times the original amount.

This is possible because of what’s referred to as fractional reserve lending – banks in the U.S. are only required to keep 10% of their deposits on reserve. So if you deposit $10 into the bank, they set aside 10%, or $1, and loan out the remaining $9. Over time the initial deposit of $10 becomes $100. This is what banks refer to as the “multiplier effect” and it is the primary way money is created. Under this fractional reserve scheme we inevitably become debt slaves to a ruling class of financial elite.







 

Banks have a monopoly on currency – The U.S. dollar is protected by legal tender laws* and backed by the government and its military. This ensures that the bankers will be successful and profitable, without having to compete.

The Federal Reserve determines how much your money is worth – Since the Federal Reserve took control, the U.S. dollar has lost more than 96% of its purchasing power. One dollar in 1913 is now worth 4 cents.

This is caused by inflation – something the Fed is very good at creating and something that has serious consequences for everyone. It means today’s hard-earned money will be worth less tomorrow. Some even call it another “tax” on the American people.  This is happening because the Federal Reserve is pumping more and more money into the economy without any connection to the amount of goods and services being produced. As a result, the value of the dollar goes down.



The Federal Reserve sets interest rates - The Federal Reserve’s Open Market Committee in New York determines interest rates and the amount of money in circulation without anyone else’s approval.  This impacts your access to student loans, car loans, home loans and more.



http://www.washingtonsblog.com/2013/07/everyone-knows-that-the-federal-reserve-banks-are-private-except-the-american-people.html

Feb 10 (Reuters) - Deutsche Bank will cut commissions on four of its biggest European exchange-traded funds, or ETFs, in a move to take market share from rivals such as Vanguard and BlackRock and win over big institutional investors.

Deutsche Asset & Wealth Management (DAWM) aims to increase its German ETF market share to 20 percent from 12.5 percent by the end of 2015 and has rebuilt some of its most successful ETFs to hold shares rather than tracking indexes synthetically.
"We want to win over especially large institutional clients like pension funds, insurance companies and sovereign investors who have put little or no money in ETFs up to now," Simon Klein, managing director of asset management at DAWM, said.

Analyst Detlef Glow at fund research firm Lipper, a unit of Thomson Reuters, said: "It's a declaration of war ... With these four indices, Deutsche Bank is making the cheapest offer on the market."
Total cost for the four ETFs - which track the DAX, FTSE 100, Eurostoxx 50 and MSCI USA - will be 9 basis points, or 0.09 percent of assets, DAWM said in a statement. The company plans to expand the list of funds throughout the year.

That will match the lowest-priced European ETFs, offered by Vanguard and HSBC, both of which charge 9 basis points for their S&P 500-tracking ETFs.
And Deutsche will beat the price on Vanguard's FTSE 100 ETF, which at 10 basis points has until now been the cheapest in the market for that index.

The average cost to manage the 230-odd EFTs now on offer by Deutsche Bank is 32 basis points.
Investors and financial advisers have favoured low-priced, passively managed index funds over actively managed funds not only due to cost, but also because many active funds have underperformed the index-tracking ETFs.

"Up to now, ETFs were too expensive for pension funds to invest in. Many could build their own indices more cheaply. With Deutsche Bank's offer, ETFs will certainly become more attractive," Glow said.
Deutsche's biggest competitors in the ETF segment are BlackRock, the world's largest money manager, U.S.-based Vanguard and Lyxor, which belongs to French bank Societe Generale.
Deutsche Bank managed 931 billion euros at the end of 2013, placing it behind competitors including Bank of America, UBS und Credit Suisse.

The foreign exchange (forex) market is the largest market in the world because currency is changing hands whenever goods and services are traded between nations. The sheer size of the transactions going on between nations provides arbitrage opportunities for speculators, because the currency values fluctuate by the minute. Usually these speculators make many trades for small profits, but sometimes a big position is taken up for a huge profit or, when things go wrong, a huge loss. In this article, we'll look at the greatest currency trades ever made.

Currency Wars: Three of the Biggest Currency Raids in History
The Currency Raids of George Soros and Andrew Krieger

In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the Black Monday crash. As investors and companies rushed out of the American dollar and into other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become fundamentally overvalued, creating a good opportunity for arbitrage. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.

Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the money supply of New Zealand. The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers.
One part of the legend recounts a worried New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi. Krieger later left Bankers Trust to go work for George Soros.  

Throughout history there have been raids on financial markets.  Sometimes the raids are malicious – an attempt to corner a market or push the price to an artificially low or high price.  In other situations a raid is simply taking a huge calculated bet on what the trader sees as an inevitable outcome.  The size of the bet has the added effect of often forcing the hands of other traders and politicians to see the error in the ways, thus moving the currency in the raiders favor.  Such raids are a statement by the speculator about policy, regulations, manipulation or the current unsustainable price of a currency.
Two traders took huge positions in the Pound and Kiwi which ultimately resulted in sharp declines and huge profits from the respective currency meltdowns.  The currency raids in these instances were not necessarily malicious (although some may view them as such), but the huge positions did cause the currencies to decline much quicker than they may have otherwise.



Currency Raids – $300 million Kiwi Currency Raid'
It is autumn, 1987 and Andrew Krieger, a trader at Bankers Trust, is watching the New Zealand dollar (NZD) in the aftermath of the 1987 stock market crash.  Currencies such as the NZD (also called the “Kiwi”) are being bid up by traders fearful of holding US dollars.  This leads to a short-term overvaluation of many currencies relative to the USD, but Krieger focused on the Kiwi.
New Zealand has a fairly small economy, and using options Krieger is able to ultimately short the entire money supply of New Zealand (according his book The Money Bazaar).  This would have been impossible if he only used the cash market.
Other traders and even the New Zealand government get involved.  The government asks Krieger to stop the raid, but ultimately the market agrees with Krieger.   The Kiwi sells-off 5% in a single day, with intra-day fluctuations up to 10% according to some sources.  Much of the decline is pinned on Krieger selling massive amounts of Kiwi dollars, yet it is also other traders acting on the information which ultimately leads to Krieger being exit his positions with a profit.
The estimated profit to Bankers Trust was $300 million.  Of which Krieger got a $3 million bonus.  This “tiny” bonus on such a well executed trade disgusted Krieger and ultimately he left Bankers Trust, going to work for George Soros in 1988.
In 1988 Bankers Trust admitted that profits from their options trading activity was overstated by $80 million in Q4 of 1987.  Therefore the profits made specifically by Krieger are drawn into question, as the many of the options that were revalued involved Kiwi dollars.  Such options were fairly new, and it is possible that Krieger was much of the market in such instruments at the time, making the options hard to value.
Either way, Krieger’s position is estimated to have been $700 million to $1 billion, with profits in the range of $220 (lowest possible gain) to $300 million.
Currency Raids – Conclusion
In both these cases, Soros and Krieger made massive bets that the rates in the GBP and NZD were unsustainably high.  Whether the traders caused the decline is ultimately questionable, but there is no doubt that the large positions frightened the market in the speculator’s direction and made the market realize these currencies were overvalued.
In the case of Soros, he saw an economic and political situation which could not sustain a high GBP price.  Krieger shorted massive amounts of the Kiwi, thinking it was artificially high after the 1987 stock market panic.  Both traders capitalized on what they viewed as an overpriced currency, and very effectively helped to bring the currency back in line with what they believed to be a more fair value.



Stanley Druckenmiller Bets on the Mark - TwiceStanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for George Soros' Quantum Fund.

Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping to push the returns of the Quantum Fund over 60%.
Possibly due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss' bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound.

George Soros Vs. the British PoundThe British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM).

Many speculators, George Soros chief among them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a drop in the pound. Britain raised its interest rates to double digits to try to attract investors. The government was hoping to alleviate the selling pressure by creating more buying pressure.

Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion off this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.



Currency Raids – George Soros and the $1 billion Profit
Leading up to Black Wednesday on September 16, 1992 when the British government was forced out of the European Exchange Rate Mechanism (ERM), there were many issues facing Britain.
The ERM required that Britain maintain the currency from fluctuating more than 6% against other currencies within the ERM.  The problem was that at the time Britain had an inflation rate three times that of Germany.  The ERM was also under attack itself as member countries felt the model would not work in the face of real-world issues. Britain falsely assumed that by joining the ERM inflation would be curbed – after all, Germany was part of the ERM and it had a very low inflation rate at the time.

George Soros saw through this tactic.   He correctly calculated that joining the ERM would do nothing to help the Pound, but would likely only hold the currency at artificially high levels.  With nothing substantial to hold the currency up it would eventually come crashing down as Britain was forced to realize the ERM could not save it from declining.

George Soros and other speculators shorted the Pound leading up to September 16, expecting that policy makers would be unable to support the currency above the fluctuation band it was mandated to adhere to.  In return, the Treasury tried to offset the speculators selling by buying Pounds.  This temporarily allowed the Pound to stay within “the band,” but ultimately even the Treasury couldn’t support the currency.  The Pound began to fall and British government got desperate.

On September 16, the government raised interest rates from 10% to 12% in attempt to bring buying support into the GBP.  The plan didn’t work and the Pound continued to fall. The massive interest rate hike was seen as a desperate attempt, and a very real signal, that the Pound was in big trouble.  More sellers flooded the market and that same day Britain said interest rates were moving up to 15%.  The announcement had little effect and was ultimately was not implemented.  Faced with a falling Pound and being unable to stabilize the currency within the band, Britain was forced to withdraw from the ERM.

In September alone the GBP/USD fell 15%, but the fallout continued.  By December the pair had fallen 25.4% – from a 2.0085 high in September to a 1.4980 low in December, 1992.
The falling Pound ultimately allowed the British economy to rebuild. It is for this reason September 16, 1992 is also called “Golden Wednesday.”

A Thankless JobAny discussion around the top currency trades always revolves around George Soros, because many of these traders have a connection to him and his Quantum Fund. After retiring from active management of his funds to focus on philanthropy, Soros made comments about currency trading that were seen as expressing regret that he made his fortune attacking currencies. It was an odd change for Soros who, like many traders, made money by removing pricing inefficiencies from the market. Britain did lose money because of Soros and he did force the country to swallow the bitter pill of withdrawing from the ERM, but many people also see these drawbacks to the trade as necessary steps that helped Britain emerge stronger. If there hadn't been a drop in the pound, Britain's economic problems may have dragged on as politicians kept trying to tweak the ERM.
The Bottom LineA country can benefit from a weak currency as much as from a strong one. With a weak currency, the domestic products and assets become cheaper to international buyers and exports increase. In the same way, domestic sales increase as foreign products go up in price due to the higher cost of importing. There were very likely many people in Britain and New Zealand who were pleased when speculators brought down the overvalued currencies. Of course, there were also importers and others who were understandably upset. A currency speculator makes money by forcing a country to face realities it would rather not face. Although it's a dirty job, someone has to do it.

Barclays Plc (BARC) leapfrogged UBS AG (UBSN) as the second-biggest foreign-exchange trader in an annual survey by Euromoney Institutional Investor Plc, pushing the Swiss bank out of the top two places for the first time since 2001.
Deutsche Bank AG (DBK) ranked first for the seventh straight year, Euromoney said in an e-mailed statement. The Frankfurt- based lender held onto its position even as its market share dropped by the most of any bank in the survey’s top 20. Royal Bank of Scotland Group Plc (RBS) fell two places to seventh, while HSBC Holdings Plc (HSBA), ranked sixth, had the biggest increase in market share as it rose one step.

“We are focused on our goal of becoming the number one bank in FX globally,” said Nick Howard, head of foreign- exchange and emerging-market distribution at London-based Barclays. “The rise to number two in the poll provides confirmation that our strategy is working.”
Foreign-exchange trading rose last year, with the value of transactions handled by CLS Bank, the New York-based operator of the largest currency-settlement system, jumping 22 percent to an average $4.1 trillion a day. Currency markets climbed to record highs for average daily trading volume in the U.K. and North America, according to central bank reports.

‘Efficiency and Innovation’

Barclays’ market share slipped 0.3 percentage point to 10.8 percent. That still left it above Zurich-based UBS, whose portion fell 0.7 percentage point to 10.6 percent, according to Euromoney. Deutsche Bank’s market share fell to 15.6 percent from 18.1 percent, while the volume traded by the banks in places four through 10 rose to 40.3 percent of the market from 36.7 percent.
“With an increased focus on both the cost of, and return on capital, foreign exchange is seen as an attractive business,” said Jim O’Neill, co-head of Barclays’ Risk Solutions Group. “Competition does of course breed efficiency and innovation.”
The information for the poll is derived from a survey of end users in the foreign-exchange market, and is based on 13,039 responses, representing $177.6 trillion of turnover, according to Euromoney.

Market Share

“People and technology are at the heart of our success,” said Zar Amrolia, London-based global head of foreign exchange at Deutsche Bank, who said he joined the company in 1995, when it was ranked 22nd in the foreign-exchange industry. “Is the competition tougher than ever before? Yes. We are making record investments, which I expect will further revolutionize our electronic business in 2011.”
Deutsche Bank will invest in new systems to focus on services for end-investors and corporate clients, Amrolia said. Deutsche Bank believes it was the first bank to have begun electronic onshore trading of the Chinese yuan, he said, referring to making a market within China for China’s currency.
“Market share is not our only goal but it does complement other benchmarks such as profitability per head and return on equity,” he said.
HSBC rose up the rankings after volumes increased, while the bank also encouraged more of its customers to participate in the survey this year, said Conor Ogle, head of marketing, communications and strategy at HSBC’s foreign-exchange unit in London. “We have been doing more business both on the cash and the derivatives side, but we can’t blindly chase market share as we’ve also got a commitment to focus on profitability.”
HSBC’s share increased to 6.3 percent from 4.6 percent, Euromoney said.

Electronic Trading

“UBS remains confident that key investments already made will deliver results throughout 2011 to further improve client satisfaction and regain market share next year,” the bank said in an e-mailed statement. “UBS has consistently succeeded in being a top three foreign-exchange bank, and this year we are particularly pleased to have regained the number one position in foreign-exchange swaps,” it said.
Electronic trading volumes increased 25 percent from the previous year, according to the Euromoney survey, to account for 56 percent of all foreign-exchange business.
“To be a leader in the foreign-exchange markets today, you must have a strong electronic trading platform,” said Barclays’ Howard.
Following is a table of Euromoney’s rankings for foreign- exchange market share (all products).

Bank                     2011                     2010
                    Rank      Share (%)      Rank      Share (%)
Deutsche Bank       1         15.6           1         18.1
Barclays Capital    2         10.8           3         11.1
UBS                 3         10.6           2         11.3
Citi                4         8.9            4         7.7
JPMorgan            5         6.4            6         6.4
HSBC                6         6.3            7         4.6
RBS                 7         6.2            5         6.5
Credit Suisse       8         4.8            8         4.4
Goldman Sachs       9         4.1            9         4.3
Morgan Stanley      10        3.6            10        2.9
BNP Paribas         11        3.2            11        2.9
BofA Merrill Lynch  12        2.9            12        2.3
Societe Generale    13        1.9            13        2.1
Nomura              14        1.5            18        0.8
Commerzbank         15        1.3            14        1.5
Credit Agricole CIB 16        1.2            17        0.8
Standard Chartered  17        1.1            15        1.3
RBC                 18        0.6            20        0.7
Bank of Tokyo MUFJ  19        0.6            22        0.5
UniCredit           20        0.6            26        0.4

Australia's largest bank, National Australia Bank (NAB), lost hundreds of millions of dollars in speculative currency trading. The scandal broke out in January 2004 when a fellow trader working in the Melbourne office of the bank exposed unauthorized foreign currency derivatives trading. Initial reports had indicated that the total loss could be as high as A$600 million but Australian Prudential Regulation Authority (APRA), country's banking regulatory body, found that the currency trading scandal has cost the bank A$360 million.



In its detailed report on the scandal released on March 24, 2004, APRA found that the board of the National Australia Bank had been lax in regulation and supervision of currency risk management system. In its report, APRA recommended 75 improvements to restore confidence in the bank. These improvements include closing down of foreign currency options operations of NAB and increasing capital reserves by A$700 million until new trading limits and better risk management controls are put into action. APRA has also recommended that NAB should increase its capital adequacy reserves ratio to 10 per cent, which stood at 9.7 per cent at the end of September 2003.



The findings of APRA are consistent with an independent review into the scandal by accountancy firm PricewaterhouseCoopers (PwC). The PwC review had also found that the currency traders had exploited loopholes and weaknesses in the NAB’s system to hide trading losses. Although the scandal was uncovered in January 2004, the PwC review found that currency traders were concealing losses for several months.

With a market capitalization of A$45.8 billion, NAB is the largest stock in the Australian financial markets. The revelation that the NAB had lost hundreds of millions of dollars on unauthorized currency trading sent shockwaves to the financial markets. The scandal wiped out almost A$2 billion from bank’s market capitalization within few days.

Undeniably, the currency scandal has severely dented the reputation of the NAB but this is not the first time that the bank has been hit by a scandal and suffered huge losses due to poor risk management controls. In 2001, NAB had to write down A$3.6 billion from the purchase of US mortgage business, HomeSide. Millions of dollars were also lost in a fraud when NAB lent money to buy fictitious coaches. In fact, just six months before the latest currency trading scandal, APRA had cautioned senior management of NAB about its lax approach towards risk management systems in currency trading.

In the aftermath of scandal, several senior staff members of NAB have lost their jobs and the board has been restructured. The so-called “rogue traders” — Luke Duffy, David Bullen and Vince Ficarra in Melbourne and Gianni Gray in London — have been dismissed and are under investigation by the Australian Federal Police. While NAB Chairman Charles Allen and Chief Executive Frank Cicutto have resigned.

The currency trading scandal at NAB was the result of a combination of factors including greed, arrogance and lax regulatory and supervisory framework. In October 2003, “rogue traders” at NAB were trading highly leveraged call options on the Australian and New Zealand dollar in the anticipation that these currencies would fall against the US dollar. But their speculative bets were wide of the mark. Instead of falling, Australian and New Zealand dollar rose substantially against the US dollar between October and December 2003. With these currencies gaining strength, the currency traders at the NAB were losing millions of dollars every day.  If “rogue traders” had closed positions as the market moved against them, the losses would have been minimal. Instead, they doubled their bets in order to recover initial losses. Taking advantage of loopholes and weaknesses in the bank's system, they also entered fictitious currency transactions in the books to cover up their losses.



What is astonishing is that fictitious currency transactions and breach of trading limits went unnoticed for months at the NAB despite a plethora of internal checks and balances. It was only on January 9 2004, when a fellow trader noticed discrepancies in trading accounts and alerted the management. At that time, “rogue traders” had incurred a loss of A$185 million. Two weeks later when the entire currency portfolio of the bank was restructured, the total losses increased to A$360 million.



To some extent, blame lies with the behavior of four “rogue traders” at the NAB who were known for their aggressive approach in currency trading. All in their early 30s, “rogue traders” were so consumed by “profit is king” culture at the NAB that they overlooked warning signals. The year-end bonuses from currency trading gave them additional incentives to conceal losses and create illusionary profits through fictitious trading. Despite highly paid, currency traders earn more money through bonuses. The four “rogue traders” each received bonuses between A$120000 and A$265000 for the financial year 2002-03, almost double their annual salary. Gary Dillon, the bank's global head of foreign exchange, received a bonus of A$500000 last year on top of a hefty salary.



Although much attention has been paid in the media about the role of four “rogue traders” in perpetuating fraud at the NAB, but several important contributory factors have been largely ignored. To a large extent, lax regulation and supervision at the NAB provided conducive environment for “rogue traders” to carry out huge speculative bets on currency derivatives. It is difficult to believe that “rogue traders” were trading beyond their daily limits without the tacit approval from the higher authorities at the NAB. As per media reports, “rogue traders” had breached trading limits on as many as 800 occasions in the year 2003 and, at one stage, had an unhedged foreign exchange exposure of more than A$2 billion. It is implausible that senior management at the NAB was unaware of non-compliance of daily Value at Risk (VaR) limits and other standards by traders.



On the contrary, senior management at the NAB ignored the violation of trading limits and other standards since “rogue traders” were generating handsome profits for the bank through speculative bets in currency markets. In the words of David Bullen, one of the four traders, “We were over the limits and they were being signed off on a daily basis...so my boss was aware, his boss was aware and then other areas of the bank were aware of this type of thing. You know, it's not like, you know, [you] can hide limits and stuff like that from the rest of the bank…All they [senior management] ever really wanted was for money to be made, and the way that came about was secondary.”



It is also difficult to believe that fictitious transactions went unnoticed by the back office of the bank for almost three months. When a currency transaction is completed in the trading room, it is passed to the back office of the bank for recording. Confirmation of the transaction also comes from outside the bank, from the counterparties of the transaction. The agreed transaction is then entered into the bank's accounting system. It is inconceivable that the counterparties did not inform the back office of NAB about their transactions for almost three months. All these developments corroborate the contention that the scandal is not limited to only four “rogue traders” and back office of the NAB is equally involved in it.



It is evident that some of the lessons from earlier derivative scandals have not been learnt. One of the main lessons learnt from the Barings scandal was the need for complete separation and autonomy between the trading room and the back office of the bank. But in the case of NAB scandal, we have seen how back office fully connived with the trading room.



This scandal has busted several myths associated with the risk management systems of banking sector. First, banks and financial institutions do not have better governance and risk management systems than the non-financial corporate sector. Second, technical solutions and models (e.g., VaR), howsoever sophisticated these may be, are of little help in preventing the financial fraud.



The NAB scandal also reflects the growing dependency among banks and financial institutions on currency speculation and other risky businesses to reap higher profits. As deregulation and rampant competition from foreign banks have eroded their profits, banks are increasingly resorting to speculative activities in currency markets. Banks are the biggest players in the global currency trading. The global currency market is the largest market in the world. Since the breakdown on Bretton Woods system in the early 1970s, currency trading has increased manifold. Nowadays, over US$1.2 trillion is traded on an average every single day in global currency markets, whereas in 1977, the daily turnover was just $18 billion.



Since foreign exchange markets are extremely volatile and pose a systemic risk, their phenomenal rise has been a matter of serious concern. According to the Bank of International Settlement (BIS), daily spot transactions have declined over the years but currency trading through derivative instruments has witnessed a dramatic increase. Unlike spot transactions, currency derivatives (e.g., currency options, currency futures and currency swaps) are less transparent. Moreover, trading in currency derivatives is not only restricted to banks and financial institutions. Recent evidence suggests that non-financial institutions and transnational corporations are increasingly trading in currency derivatives. It is generally claimed that transnational corporations indulge in currency derivatives to protect their overseas businesses from foreign exchange risk but the possibilities of misusing currency derivatives to book speculative profits cannot be denied.



Although derivatives are supposed to help in reducing risk, they have become one of the biggest sources of volatility and instability in the global financial markets. Warren Buffett, the world's greatest stock market investor, recently described derivatives as financial weapons of mass destruction. In the Annual Report of Berkshire Hathaway (2002), Buffett stated “We view them [derivatives] as time bombs both for the parties that deal in them and the economic system ... In our view ... derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Since derivatives are highly leveraged instruments, a small fluctuation in prices and exchange rates can cause huge losses to parties involved in such transactions and thereby pose systemic risk. We have seen how the collapse of massive hedge fund Long-Term Credit Management (LTCM) in 1998 had almost brought the global financial system to its knees.



In global currency markets where the risks and rewards are astronomical, the possibilities of frauds are also enormous. No wonder, the world is increasingly witnessing a series of currency trading scandals. Some scandals have come out in the open while others remain buried. Two recent scandals involving banks are cited here. In 2002, AllFirst Financial, a subsidiary of Allied Irish Bank — Ireland's second largest bank — lost US$750 million on foreign currency options trading when its trader, John Rusnak, systematically falsified bank records and documents to hide losses from speculative bets. Rijecka Banka — Croatia’s third largest bank — lost US$100 million (nearly three-quarters of the bank’s capital) in March 2002 when its currency dealer, Eduard Nodilo, indulged in unauthorized foreign exchange trading to hide past losses. In the aftermath of this scandal, the German bank, Bayerische Landesbank, sold its 59 per cent share in Rijecka Banka to the government for a symbolic price of US$1. The growing list of currency trading scandals calls for greater regulation of banks involved in currency trading, particularly currency derivatives.



To sum up, the NAB currency trading scandal not only demonstrates that very little has changed in the past one decade, but also raises fears of recurrence of it if policy makers remain oblivious of their responsibility to regulate banks as well as global currency markets.

Central banks have emerged over the past four centuries when mankind moved from a system of gold or silver backed currencies to private issuers to fiat money. The first central bank in the world was the Swedish Riksbank, founded in 1668.
Scottish businessman William Paterson founded the Bank of England in 1694 on request of the British government to finance a war.
The First Bank of the USA was founded in 1791 and had a 20-year charter. It was however revived again in 1816 and gave birth to the Second Bank of the United States. This desperate move to stabilize the currency by US president James Madison was later revoked by US president Andrew Jackson who withdrew the bank's Federal Charter in 1836. In 1841 the Second Bank of the United States ceased all operations.
The history of central banking came alive again in 1913 with the constitutionally disputed foundation of the Federal Reserve.
As nearly all currencies in the world have transformed into fiat money over the past 4 centuries, i.e. the notes mandated to be used by government fiat, all countries have some sort of central bank that is responsible for keeping inflation low and provide a money supply that does not overshoot economic growth too much. Other tasks vary widely from country to country.
Political pressure has often led to inflation as rulers want to finance their activities with the in the first place seemingly cheap money.

Central Banking

Central banks primarily purchase short-term debt issued by the governments of the countries in which they serve. Sometimes they've been used as a political piggy bank with the central banks buying riskier investments causing huge losses and inflation if the bank's government doesn't bail them out since the bank has no assets to sell to counter inflation, leaving to many banknotes in circulation.