Royal Bank of Canada accused of driving down value of NZD

The Royal Bank of Canada temporarily suspended three foreign exchange traders at its London office in mid-March and forwarded the matter to British securities regulators after an investigation into a breach of the company’s internal policies. A company spokesperson says RBC is likely to avoid serious censure by the U.K.’s Financial Services Authority (FSA) for the currency trading irregularity that took place in November.

RBC recently completed an internal probe of trading activities that were designed to drive down the value of the New Zealand dollar. Three staff members have been suspended. The bank also notified the FSAof its investigation. Industry experts say RBC traders tried to push down the value of the New Zealand dollar to activate stop-loss sell orders. Some of the orders can be triggered simply if one of the two major interbank currency trading networks — consortium-owned EBS and a system owned by Reuters — shows a stop-loss level as a tradable price on its screens.

Forex participants in public Web forums say the RBC traders exploited a well-known loophole on the systems banks use to trade currencies with each other. By blocking other banks’ ability to trade on its New Zealand dollar prices, the RBC traders were able to post artificially low prices on the inter dealer systems’ screens without the risk they would be asked to execute at those low rates, according to forum discussions. The fact that the rate appeared on the screens was enough to activate the stop loss orders.

Trading systems generally leave banks to decide who can block trading, and why. The systems rely on the good faith of market participants not to abuse that function. Trying to push a currency down is normal practice for banks, but doing it specifically to trigger other people’s orders breaches informal rules in the non-regulated foreign exchange market, says Michael Woolfolk, senior currency strategist at the Bank of New York.

Data from the Bank for International Settlements indicate the New Zealand dollar accounts for just 1 percent of the turnover in the $1.9 trillion- a-day forex market.

Although it has oversight over the market for options and derivatives because they are considered investment instruments, the FSA cannot set rules in the spot forex market. But the FSA can judge firms to be unfit for business if they breach guiding principles of fair conduct in the financial markets.

It is not known whether the RBC traders did, directly or indirectly, affect the forex options market with the November trade. The sums involved also have not been disclosed. Banks involved in the forex market hope RBC’s internal investigation into the matter, and the fact the FSA has been informed, will stop similar incidents in the future because they are eager to avoid the administrative burden of regulation, Woolfolk says.