UK prosecutors have opened a criminal investigation into alleged manipulation of foreign-exchange benchmarks, more than a year after the British markets regulator first began a review.

The Serious Fraud Office is probing "allegations of fraudulent conduct in the foreign-exchange market," the London- based agency said. Authorities around the world have been investigating whether traders rigged the $5.3 trillion-a-day currency market after the Financial Conduct Authority opened its review last year. Regulators and prosecutors are scrutinising whether dealers at the world's biggest banks traded ahead of their clients and colluded to rig the WM/Reuters rate, a benchmark that pension funds and money managers use to determine what they pay for foreign currencies.

More than 25 traders have been fired, suspended or put on leave since scrutiny began last year. Banks including Citigroup, Deutsche Bank, Barclays and UBS, the top four currency dealers according to Euromoney Institutional Investor Plc's annual survey, have said they are cooperating with the probes. Spokesmen for the banks declined to comment on the SFO investigation.

While the FCA has taken the lead in probing the allegations in the UK, the US Department of Justice has been investigating possible criminal angles to the matter since last year. Prosecutors there could bring charges and levy fines in the case as soon as this year, a person with knowledge of the affair said last month. The widening probe may push more transactions onto electronic platforms, analysts have said. While traders have been replaced by machines in other markets such as equities, most currency trading takes place off of exchanges, forcing clients to rely on their dealers for market and order-book information. In the long term, the investigation "will likely drive even more FX flow into electronic platforms and trading algorithms," improving transparency in the FX market for institutional investors, according to Kevin McPartland, head of market-structure research at Stamford, Connecticut-based financial research firm Greenwich Associates.

Still, “the short-term impacts on customers will be negative as bank sales forces will provide less and less market color due to fears of even being perceived as saying anything deemed inappropriate by regulators,” McPartland said.

The SFO’s decision to wait to open an investigation of its own prompted criticism from British lawmakers, who said the alleged offenses were similar to those found in manipulation of the London interbank offered rate, or Libor. The SFO is separately prosecuting a dozen people in London in the Libor inquiry.

Seventeen individuals have been charged worldwide for alleged rigging of the interest-rate benchmark.

Bloomberg