VSCentral banks are responsible for overseeing their country’s monetary system and establishing regulations to keep its markets balanced. Part of this includes establishing benchmark exchange and interest rates and supervising exchanges around the world.
In recent years, “risk-free” benchmarks and the implementation of codes of conduct have made it more difficult to manipulate the foreign exchange and fixed income markets; however, it is still possible. Due to the sheer size and complexity of the markets, central banks need an automated surveillance solution, such as Nasdaq Market Surveillance for Central Banks, to collect, store, and analyze data to quickly, efficiently, and market abuse behavior effectively.
Back to the manipulation of the foreign exchange and fixed income markets
The pricing and issuance of many financial instruments are based on currency and interest rate benchmarks, and throughout the past decade these markets have been plagued by scandals. For example, in 2012, a group of commercial banks conspired to manipulate Libor in order to profit from transactions or affect perceived creditworthiness, causing a cascade of mispriced assets throughout the financial system.
In 2013, an FX scandal rocked the markets again. The fixed rate FX is based on observed transactions, so the FX brokers of the big banks are plotting to profit and influence the fix itself.
In addition, the International Organization of Securities Commissions (IOSCO) and the European Union have adopted measures to strengthen the benchmark settlement process, improve transparency and prevent conflicts of interest. In addition, the Foreign Exchange Working Group, in partnership with the Market Participants Group, has published a code of conduct, the FX Global Code, the main communication of which is that no one should act in the market with the intention of manipulating it.
Due to increased manipulation, regulators around the world have begun to crack down on perpetrators. In 2014, regulators in the US, UK and Switzerland filed and settled charges against several major banks.
Why Financial Institutions Need Market Surveillance
With more diverse participants, new technologies and different platforms, the foreign exchange and fixed income markets are more complex than ever. Although efforts have been made to improve transparency, such as the Trade Reporting and Compliance Engine (Trace) in the United States and new regulations and benchmarks around the world, the increasing complexity still leaves the market in a blind spot. It may be harder to handle, but it’s not impossible.
Financial institutions, including central banks, need a sophisticated surveillance program, like Nasdaq Market Surveillance (NMS), to monitor activity and detect potentially harmful behavior. NMS provides customers with high-quality data and displays it in a dashboard, making it easier to interpret and understand. Additionally, system alerts detect unusual trading patterns compared to historical trends so users can identify manipulation and investigate if necessary. Nasdaq Market Surveillance is crucial for detecting market abuse quickly and effectively, protecting the financial system and the economy.