George Osborne is taking financial market abuse seriously. The British chancellor wants to criminalise the practice in more asset classes, so manipulators can be sent to jail. He has been spurred to action by accusations of rigging in the $5-trillion-a-day currency trading market, which is centred in London. The additional penalties are sensible, but something important is missing at a global level.
The Financial Services Act already makes it a criminal offence to manipulate Libor benchmark interest rates in the UK. After subsequent allegations of foul play around key rates in other markets, including currencies and commodities, Osborne plans to expand the scope of the existing rules. He can fast-track the process once a list of additional benchmark rates is drawn up.
Osborne knows that any trader thinking about misbehaving will be more afraid of prison time than a fine or even a ban from working in the financial industry. The European Union has made the same observation, and new rules, quite similar to the British plan, will take effect in 2016. The United Kingdom can introduce jail sentences sooner by acting alone, probably before the end of the year. Besides, the British rules are likely to be tougher than the EU standard. The anti-abuse law for Libor allows for jail terms up to seven years, compared with the EU's four.
So far, so good. But currency traders cannot obey the law, and prosecutors cannot win abuse cases, unless the boundaries of legal behaviour have been defined for their largely unregulated market. That isn't the case right now. The line that separates desirable risk management from unacceptable market abuse is still pretty fuzzy.
Of course, foreign exchange trading is a global business, and Osborne would not want a purely British standard of good behaviour. That might cost London business, if other jurisdictions were more permissive. It might take a while to find an international agreement. But Britain can build on its good start by pushing for quicker progress.
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