Gribble, whose family has toiled on this land for three generations, works more than 13 hours a day and uses the highest-yielding breed and most up-to-date farming techniques. Still, he barely scrapes a profit as a glut in supply and slackening demand push the price of milk below his production cost. If it weren’t for the subsidy he gets from the European Union, he’d have to sell his Holstein Friesian cows.
Gribble’s payout has to be exchanged into pounds, meaning what he gets is dictated by currency traders sitting behind computer screens 50 miles away in London’s financial district. Each year a bank wins the mandate to convert about 3.4 billion euros ($4.1 billion) of subsidies to sterling. The rate they use has less to do with free-market economics than self-interest, according to four traders and salespeople interviewed by Bloomberg News who said their goal was to make the most money they could for their firms to the detriment of their clients.
“It’s despicable what these traders have been doing,” said Gribble, 60, drinking a cup of coffee in the kitchen of his farmhouse. “Those subsidy payments make the difference between us making money, or not. They are stealing money that’s essential to keeping food on the shelves of supermarkets across the U.K.”
ECB Fix
Gribble and more than 100,000 other U.K. farmers who receive payments are just some of the victims of dealers at the world’s biggest banks who manipulated the $5.3 trillion-a-day currency market for years. Last year six banks were fined $4.3 billion by regulators who found that traders colluded to rig the price of money and boost their own profits at the expense of pensioners, investors, companies and ordinary citizens.
The EU requires the U.K. government to exchange the currency at the European Central Bank benchmark rate on the last trading day of September. The price, set at 1:15 p.m. in London, is derived from a snapshot of trades and is supposed to be an independent measure of the value of currencies. It’s anything but, the traders said.
When London-based Barclays Plc (BARC) won the job for 2011, the first thing its foreign-exchange desk did was to place bets with its own money that the euro would fall against the pound, knowing that the transaction would move the market lower, said one trader with direct knowledge of the deal who asked not to be identified because he still works in banking.
Selling Euros
Then they started selling euros with the goal of moving the exchange rate lower so when it fixed they could buy the euros back for less, three former Barclays employees said. Their profit was the difference between what they sold the euros for and the price at which they bought them back.
Salespeople at Barclays, the world’s third-biggest currency dealer, also told their best customers, including some of the largest hedge funds, that the bank would be selling euros in the expectation the clients would adopt the same trading strategy, turbocharging efforts to push the exchange rate lower, the former employees said.
The firm sold more euros at about 1:15 p.m. in a final bid to move the rate, they said.
‘Civil Wrong’
Europe’s single currency rate fell by more than 73 basis points between Sept. 28, 2011, and the ECB fix on Sept. 30, 2011, according to data compiled by Bloomberg. While it’s impossible to quantify how much of that drop was a result of Barclays’s selling, two traders at other banks who employed similar tactics said such maneuvers could move the rate by at least 50 basis points. A basis point is 0.01 percentage point.
A move that size would have cost U.K. farmers more than 16 million pounds ($24 million) on a subsidy that year of 3.2 billion euros and Gribble as much as 580 pounds.
“Banks are entitled to trade on a proprietary basis, but if they enter into a contract with a client to exchange at the market rate, but then intentionally push down that rate against their client for their own profit, then that potentially has the characteristics necessary for a civil wrong,” said Simon Hart, a London-based lawyer at RPC LLP. “They are engaging in activities that are adverse to their client’s interests and that could leave them open to a legal claim.”
Giles Croot, a spokesman for Barclays, declined to comment.
Queen Elizabeth
Gribble isn’t the only farmer to rely on the subsidy to make a profit. More than half the U.K. recipients of the payments — meant to offset the high cost of land, fuel and other supplies — would be unprofitable without it, according to the Department for Environment, Food & Rural Affairs. Beneficiaries range from tenant farmers such as Gribble to large landowners including Queen Elizabeth and her son, Charles, next in line to the throne.
The tactics employed by Barclays were typical of how traders in the lightly regulated foreign-exchange market took advantage of customers by sharing confidential information about their orders with traders at other firms and rigging benchmark rates, authorities found.
In November, the British markets regulator chronicled in its settlement with Citigroup Inc. (C) how the world’s biggest currency dealer had led an effort to rig the ECB benchmark. A trader at the New York-based bank and four unidentified counterparts at other firms got together in a chat room in the minutes before the fix and discussed how they would work together to move it in their favor. The settlement didn’t say when the conversation took place.
‘Worked Ok’
After persuading members of the group to transfer their euro orders to him, the Citigroup trader bought 374 million euros in 33 seconds around the fix in order to move the rate as high as possible, the settlement documents show. He was successful, and the bank made a $99,000 profit, the U.K. Financial Conduct Authority said.
“cnt teach that,” one of the traders said in an undated chat. “yeah worked ok,” the Citigroup dealer replied.
Citigroup was fined more than $1 billion by the FCA and U.S. authorities, the most of the six banks penalized. Barclays withdrew on the eve of the settlement and is still in negotiations with regulators.
Jeffrey French, a Citigroup spokesman, declined to comment. A spokesman for the ECB said its rates reflect the market at the time and are “released for reference purposes only.”
Winning the mandate was no guarantee a bank would make money, one trader said. A dealer’s efforts to push the rate could be countered by unexpected market-moving economic news or other large orders against his strategy, the person said.
Farmers’ Union
The National Farmers’ Union, a trade group in England and Wales that counts Gribble as a regional chairman, said it had been talking to Defra for years about how to deal with the volatility around the fix of the euro-to-sterling exchange rate. After three years of lobbying, Defra persuaded the EU in 2013 to change how the exchange rate on the subsidy is calculated.
The U.K. now has the option of exchanging currency using an average of all ECB fixes in September, which will make it harder for banks to rig the rate.
“The move was sought by Defra to lessen the potential impact of volatility,” the agency said in a statement. “It also reduces scope for speculators to seek to take advantage of an expected large single transaction.”
Bloomsbury Group
In 2013, U.K. farmers received what is known as an entitlement of 324 euros for every eligible hectare of lowland they farmed. Gribble’s farm, where he also raises sheep and grows crops, has about 400 hectares (988 acres) that qualify, making his award about 130,000 euros that year, or 108,000 pounds, before government taxes.
“There are firms out there who offer to hedge the currency exposure associated with the subsidy, but I’ve never done that as I’ve always assumed I was getting a fair rate,” said Gribble, whose father was friendly with Keynes.
The economist, who died in 1946, wrote that governments need to intervene to moderate swings in the economy. Keynes lived at Tilton House, next door to the Gribble farm and a short walk from Charleston House, where he’d visit friends in the Bloomsbury Group, which included writers Virginia Woolf, E.M. Forster and T.S. Eliot.
“You’re not going to make a fortune in farming, but it’s the only way of life I’ve ever known,” said Gribble, who now farms alongside his son. “I tried to put my son off when he said he wanted to be a farmer, because life can be hard.”
Gribble says the money he receives from the EU is essential as he is losing 5 pence on every liter of milk he produces.
“It’s hard enough to survive without all this” rigging, said Gribble, surveying his farm from the top of the windswept South Downs overlooking the wide expanse of the English Channel. “It has a direct impact on people’s livelihoods.”
Source: Bloomberg
