The Wall Street Journal and my fellow Reuters blogger Felix Salmon have both addressed the issue of the Bank of New York Mellon giving off-market or false prices on foreign-exchange trades to one of their clients, namely California pension fund Calpers.

Morally the actions of BONY, if true, are reprehensible. But are they illegal?  Felix describes the specific problem:

BNY Mellon’s clients put in FX orders, the bank executed those orders and reported back a price. Only it lied to its clients about the price it was getting, padding its own profits while so doing. This is doubly evil: not only did the bank lie, but it lied while serving as a fiduciary to its clients, with an affirmative duty to give them “best execution.”

Point one: OTC markets are barely regulated

Foreign-exchange trades are conducted “over the counter” (OTC). OTC is basically two parties coming together in some manner and the opposite of an “exchange market” where a multitude of buyers and sellers come together for regulated dealing. For example, exchanges require market-makers to provide certain levels of liquidity, trade reporting and standards of fair dealing.

OTC markets lack these requirements, and regulators have yet to address many of these issues. There are lots of opportunities for custodians or dealers to provide “off-market” or inflated trade prices to clients because trade reporting is not public. Can we blame dealers for driving the truck through a mile-wide hole in the rules?