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ESI Unit 5 Lesson 3 - Foreign Exchange Markets Flashcards | Quizlet

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Start studying ESI Unit 5 Lesson 3 - Foreign Exchange Markets. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

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FOREX - Is a strong dollar better than a weak dollar.pdf

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1. The role of the foreign exchange market and the exchange rate

2. The importance of real exchange rates and their role in the current account

3. The difference between fixed exchange rates and floating exchange rates

4. Considerations that lead countries to choose different exchange rate regimes.

5. The meaning and purpose of devaluation and revaluation of a currency under a fixed exchange rate regime

6. Why open-economy considerations affect macroeconomic policy under floating exchange rates

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G02s_Basic Examples of the FEM - solution.pdf

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G03_FEM Changes in D and S of Currencies.pdf

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G07_FEM - Effect of Exports and Imports.pdf

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G07s_FEM - Effect of Exports and Imports - solution.pdf

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Foreign Exchange Fraud

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For the world's biggest banks, what seemed like the perfect business turned out to be the perfect breeding ground for crime.

The trading of foreign currencies promised substantial revenues and relatively low risk. It was the kind of activity that banks were supposed to expand after the 2008 financial crisis.

But like so many other seemingly good ideas on Wall Street, the foreign exchange business was vulnerable to manipulation, so much so that traders created online chat rooms called "the cartel" and "the mafia."

No one government agency is responsible for policing the currency market, leaving it up to committees, some run by the banks themselves, to set guidelines. And even when federal authorities adopted rules to rein in Wall Street a few years ago, they exempted certain foreign exchange transactions, a little-noticed concession to banks.

Now, the regulatory void has spawned another round of criminal accusations and multibillion-dollar penalties - enough to wipe out nearly all the revenue that major investment banks generated from their foreign exchange businesses last year.

On Wednesday, four large global banks - Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland - pleaded guilty to a series of federal crimes over a scheme to manipulate the value of the world's currencies. The Justice Department accused the banks of collusion in one of the largest and yet least regulated markets, noting that at one bank one trader remarked "the less competition the better."

That lack of oversight, coupled with the pressure to squeeze profits from a relatively middling business, set the stage for this scandal, one that unfolded nearly every day for five years. The crimes described on Wednesday also painted the portrait of something more systemic: a Wall Street culture that enabled many big banks to break the law even after years of regulatory black marks after the crisis.

"If you aint cheating, you aint trying," one trader at Barclays wrote in an online chat room where prosecutors say the price-fixing scheme was hatched.

In announcing the cases, the Justice Department emphasized that the banks' parent companies entered the guilty pleas rather than a subsidiary, representing a new frontier in efforts to punish Wall Street misdeeds. At a news conference, Loretta E. Lynch showed that she had taken on the mantle as top Wall Street cop, less than a month after she was confirmed to replace Eric H. Holder Jr. as attorney general.

"Today's historic resolutions are the latest in our ongoing efforts to investigate and prosecute financial crimes," Ms. Lynch said on Wednesday.

For the banks, though, life as a felon is likely to carry more symbolic shame than practical problems. Although they could be barred by American regulators from certain activities, the banks scrambled behind the scenes to persuade those regulators to grant exemptions. That process, which delayed the Justice Department's announcement by a week, already led to the Securities and Exchange Commission providing a number of waivers that allow the banks to conduct business as usual.

And at least for now, the Justice Department did not indict any employees whose errant instant messages underpin the cases against the banks. The banks long ago dismissed most of the employees suspected of wrongdoing, though New York State's financial regulator, Benjamin M. Lawsky, forced Barclays to dismiss eight additional employees.

A fifth bank, UBS, was also accused of foreign currency manipulation. Although it was not criminally charged for that misconduct, the accusations cost the bank an earlier nonprosecution agreement related to the manipulation of another financial benchmark, the London Interbank Offered Rate, or Libor, which underpins the cost of trillions of dollars in credit cards and other loans. The Justice Department voided that nonprosecution agreement, prompting UBS to plead guilty to Libor manipulation, a rare stand against corporate recidivism.

In private negotiations, lawyers for UBS argued that the punishment was "unfair," and had the bank's chief executive make an in-person entreaty to prosecutors. But even after appealing to the deputy attorney general, their request was denied, a person briefed on the negotiations said.

"UBS has a 'rap sheet' that cannot be ignored," said Leslie Caldwell, head of the Justice Department's criminal division.

The five banks - which also struck civil settlements with the Federal Reserve, the Commodity Futures Trading Commission, a British regulator and Mr. Lawsky - agreed to pay about $5.6 billion in penalties. That comes in addition to the $4.25 billion that some of these banks agreed to pay in November to many regulators.

"There is very little that is more damaging to the public's faith in the integrity of our markets than a cabal of international banks working together to manipulate a widely used benchmark in furtherance of their own narrow interests," said Aitan Goelman, the trading commission's head of enforcement.

The foreign exchange business may have been particularly susceptible to manipulation, analysts say, because it can be less profitable than other forms of trading. That dynamic may have increased the incentives for the traders to break the rules.

And unlike the stock market, where regulators can monitor every trade, federal regulators lack a formal mandate to watch the currency market. In fact, in the aftermath of the financial crisis, Congress opened the door to regulating the market, but the Treasury Department exempted portions of it from certain new rules.

That regulatory gap has started to narrow. Banking regulators, which have the authority to root out unsafe practices, are increasingly scrutinizing currency trading desks in light of the scandal.

"It has come under even higher levels of scrutiny than certain other fixed businesses went through after 2008 financial crisis," said George Kuznetsov, head of research and analytics at Coalition, a financial analytics provider.

Facing that scrutiny, the trading desks have lost some of their swagger. Some senior traders now spend less time trading and more time retraining their teams and meeting with clients to reassure them that their business practices are sound, people close to the business say. Many banks have reined in chat rooms, which were at the heart of the fixing scheme but were also a home for trading desk banter and camaraderie. And even those not implicated in the scheme bowed out in the last year, with Citigroup and Goldman Sachs traders leaving for hedge funds.

The recent turmoil surrounding the foreign exchange business reflects broader struggles over the role of Wall Street's trading operations.

Regulatory headaches and unpredictable trading results in currencies, commodities and interest rates have prompted many banks to evaluate whether some of these businesses are more trouble than they are worth.

"The behavior that resulted in the settlements was an embarrassment to our firm," Citigroup's chief executive, Michael L. Corbat, said in a memo to employees on Wednesday. As part of its plea deal, Citigroup will pay a record $925 million antitrust penalty, the largest single fine ever imposed for a violation of the Sherman Act.

Foreign exchange revenue totaled $11.6 billion at 10 of the world's largest banks last year, according to Coalition analysis. That revenue had declined nearly every year since 2008, when it reached an estimated $21.7 billion.

The decline came as central banks around the globe worked to keep interest rates low, and the value of some world currencies remained relatively steady. Investors tend to place fewer trades when prices are moving largely in one direction.

The foreign exchange market did brighten a bit in the first quarter, as the banks said their results were buoyed by diverging monetary policies around the world and increased volatility.

Despite the headaches, most large banks remain committed to foreign exchange because valuable clients like hedge funds and big companies demand it. For banks desperate to advise big companies on mergers and acquisitions, they see foreign exchange as a "gateway" toward attracting their more profitable business.

"Foreign exchange is not a complete loss leader for the banks," said Fred Cannon, a banking analyst with the investment bank Keefe Bruyette & Woods. "But it is not a profitable stand-alone business either."

Because so many buyers and sellers flood the foreign exchange market - more than $5 trillion changes hands every day - the money banks can charge for brokering trades tends to be lower than for products like derivatives.

To get an edge, prosecutors say, traders at the five banks colluded to pad their returns from at least 2007 and 2013. To carry out the scheme, one trader would typically build a huge position in a currency, then unload it at a crucial moment, hoping to move prices. Traders at the other banks would play along, coordinating their actions in online chat rooms.

The banks also misled their clients about the price of currencies, the federal and state authorities said, imposing "hard markups," which one Barclays employee described as the "worst price I can put on this where the customer's decision to trade with me or give me future business doesn't change."

In the invitation-only chat room known as "the cartel," the stakes were high. "Mess this up," one newcomer was warned, "and sleep with one eye open."

A version of this article appears in print on , on Page A1 of the New York edition with the headline: Banks Admit Scheme to Rig Currency Price . Order Reprints | Today's Paper | Subscribe

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Rigging of Foreign Exchange Market Makes Felons of Top Banks

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For the world's biggest banks, what seemed like the perfect business turned out to be the perfect breeding ground for crime. The trading of foreign currencies promised substantial revenues and relatively low risk. It was the kind of activity that banks were supposed to expand after the 2008 financial crisis.

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Watch Saturday Night Live highlight 'Adventures of the Dollar' on NBC.com