BoE dismisses chief forex trader over 'serious misconduct'

The Bank of England's former chief foreign exchange dealer has been absolved of involvement in improper conduct of traders, but criticised for failing to pass on concerns about a practice he thought could involve collusive behaviour.

An investigation led by Lord Grabiner QC, the lawyer also appointed by News Corp to investigate the phone hacking scandal, found "no evidence to suggest that any bank official was involved in any unlawful or improper behaviour in the FX market".

Martin Mallett, the official who chaired an industry committee of top foreign exchange traders, "did not act in bad faith", Lord Grabiner found, and was not aware of the conduct that has led regulators to impose fines totalling $4.3bn against six banks after an investigation into the rigging of benchmark rates.

However, the BoE put out a separate statement on Wednesday saying that following a disciplinary process "unrelated to Lord Grabiner's investigation", Mr Mallett, who was suspended in March, was dismissed on November 11. This was "for serious misconduct relating to a failure to adhere to the Bank's internal policies".

According to Lord Grabiner, Mr Mallett was aware as early as 2008 that banks' traders were sharing aggregate information in chat rooms about the positions they held ahead of benchmark fixings, with a view to matching them off.

This practice is not necessarily improper, but Mr Mallett expressed concerns at how it could be perceived. These concerns had clearly strengthened by March 2012, when he received a phone call from Niall O'Riordan, a senior UBS trader who has since been suspended. Mr O'Riordan was seeking advice because a manager was worried - in the context of the Libor investigations - about "the shenanigans that could possibly go on around fixings", according to a transcript of the call.

Mr Mallett warned Mr O'Riordan that the "chattiness" of the foreign exchange market looked "increasingly anachronistic" in a climate of greater regulatory scrutiny, and said the mechanisms created by traders to dissipate risk were "in that sort of shadowy darky murky area". He would "feel uncomfortable justifying it to the regulator the way it's currently set up", he added.

The issue was discussed at the next meeting of the chief dealers sub group, but there is no full record of what was said. However, in later phone calls with market participants, Mr Mallett expressed similar concerns about the discussions that took place in traders' chat rooms, saying that "it's a fine line, particularly in this environment, between chattiness and collusive behaviour" that could leave some market participants at a disadvantage.

The report criticises Mr Mallett for failing to pass on these concerns, calling it an "error of judgment".

Perhaps more significant for Mark Carney, the BoE governor, it also highlights a lack of clarity in the bank's relationship with market participants, despite the huge expansion in its appetite for "market intelligence" over the past decade.

"I am concerned that the bank's systems and controls have not always kept pace with this change of role," Lord Grabiner wrote. "I have not seen any public document which clarifies the relationship between the bank and market participants in the context of market intelligence . . . the bank should explain to market participants its role in this regard and the uses to which it puts such intelligence".

The BoE has changed its policies on record keeping after Mr Carney faced tough questions from MPs earlier in the summer, asking why the institution did not act on concerns around the foreign exchange fixings that stretched back several years.

The report recommends that it reviews these policies and improves training for any BoE official whose work relates to the foreign exchange market or to market intelligence.

Mr Carney, answering questions after publication of the BOE's latest quarterly forecasts, said he was "disappointed" at the behaviour identified in the report and that the BOE accepted the criticism of its practices. It was acting on the recommendations on record keeping, training and "in terms of how we handle market information", he added.

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