FCA Probes Sterling Spike Ahead of UK Interest Rate Decision

FCA Probes Sterling Spike Ahead of UK Interest Rate Decision
31.01.2020 10:07 am

FCA Probes Sterling Spike Ahead of UK Interest Rate Decision

RegTech , Banking

The Bank of England has referred to the UK markets watchdog a spike in sterling that happened just seconds before the central bank announced that it would leave its key interest rate unchanged. The Financial Conduct Authority, whose job it is to detect market abuse, is now scrutinising the matter, according to both the central bank and the watchdog. It is the second referral from the BoE around possible market manipulation in as many months — following the revelation in December that some traders may have received an audio feed of the central bank’s press conferences ahead of the rest of the market. Traders were caught on the back foot on Thursday when the pound suddenly strengthened 15 seconds before midday UK time, when the BoE announced its decision to hold interest rates at 0.75 per cent. Sterling ripped from $1.3023 to $1.3089 in the minute before the announcement and it also gained by a similar amount against the euro. The move in the currency has raised suspicions about the possibility of a leak and whether traders were able to front-run the rate-setting meeting, which was the last overseen by outgoing BoE governor, Mark Carney. The FCA does not regulate the spot FX market, but when currency trading affects other regulated markets, it can take action. Analysts said the spike could have an innocent explanation. As the majority of currency deals are negotiated privately and off-exchange, finding the trader that posted the order is difficult. The watchdog will need at least 24 hours to trawl through data before it can determine potential signs of market abuse. One trader at a large bank said liquidity conditions were very thin ahead of the decision, as investors stayed on the sidelines before the announcement. “Markets can be very illiquid around these times and orders can have a much bigger impact than usual,” one trader said.

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Data from futures markets show a large order betting on a strengthening pound hitting the market just 15 seconds before the announcement. Analysis from data provider New Change FX also show that 15 seconds ahead of midday, spot market prices moved nine times as much as the average shift per second in exchange rates. The BoE was already mired in controversy over the early release of data after announcing in December that it had investigated whether some investors were benefiting from audio material fed from the conferences that the BoE holds after decisions. The matter was also referred to the FCA, which is undertaking continuing inquires, although it has not launched a formal enforcement investigation. The rate decision from the Monetary Policy Committee is not released through video or audio. Instead, the data are published on the central bank’s website and simultaneously are pumped through digital channels to computer traders.

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