Federal Reserve clampdown on staff trading turns spotlight on other central banks

The heads of two eurozone central banks own sovereign debt bought by the European Central Bank. The chief economist at another guardian of monetary stability owns stock in a major investment bank. Two officials at a third hold financial assets that may have benefited from central bank action.

By tightening the rules on personal investments by its top officials, the US Federal Reserve has highlighted how staff at several other major central banks hold financial assets, triggering questions about the possibility of conflicts of interest.

While the Bank of Japan forbids trading in any financial instruments except for deposits, insurance policies and government bonds — with a ban on even those in the seven days before a monetary policy meeting — other central banks allow more freedom. In the eurozone, the UK, Canada and Sweden, top central bank officials can, under certain conditions and sometimes with prior approval, trade stocks and bonds of individual companies, although not financial institutions.

Pushing the issue to the fore is the fact that quantitative easing — the once radical but, since the 2008 financial crisis, widely adopted approach to monetary easing — involves central banks buying government and sometimes corporate financial assets that staff might own.

The ECB told the Financial Times that Isabel Schnabel, who joined its executive board in 2020, had this year sold shares she owned in more than 30 individual companies — almost a third of which have bonds bought by the ECB — “to avoid even an appearance of a conflict of interest”. An ECB ethics review is also seeking to harmonise and potentially tighten overlapping sets of rules.

The issue has in addition raised its head at the BoE, where new chief economist Huw Pill told parliament he held Goldman Sachs shares from his former job at the US bank. Pill said he expected the shares to be turned into cash or debt to avoid creating a potential conflict of interest with a regulated financial institution.

Sweden’s Riksbank is also under scrutiny after its governor Stefan Ingves and deputy governor, Cecilia Skingsley, were found to own shares in a number of companies whose debt has been bought by the central bank. Ingves has been summoned to a parliamentary hearing to discuss the issue and the Riksbank is reviewing its ethics rules after a recent check found some employees had carried out unethical share trading.

The Riksbank said Ingves and Skingsley had “both purchased these shares prior to being appointed members of the executive board of the Riksbank and their holdings have remained unchanged since then”. It added that they had not taken decisions about what shares to buy, as these were “delegated to the markets department”.

The Fed this month adopted new rules banning its policymakers and senior staff from buying individual shares and a string of other investments, in a move designed to stamp out a growing furore over trading by top officials.

The new rules, which the Fed said would mean its senior officials “will be limited to purchasing diversified investment vehicles, like mutual funds”, were introduced after uproar over large individual trades made by Eric Rosengren, then president of the Boston Fed, and Robert Kaplan, then president of the Dallas Fed. Both have since stepped down.

The Fed said senior staff would be “required to provide 45 days’ advance notice for purchases and sales of securities, obtain prior approval for purchases and sales of securities, and hold investments for at least one year”. In addition: “No purchases or sales will be allowed during periods of heightened financial market stress.”

Randall Kroszner, a professor at the University of Chicago business school and a former Fed governor, said other central banks were likely to follow a similar path. “It is very important to maintain the credibility of the decision-making process of central banks and to not have any potential bias.”

The ECB, for example, “recommends” the 25 members of its governing council and their alternates put their personal investments “under the control of one or more recognised portfolio managers who have full discretion” over trading decisions. But only two chose to do so — the heads of the French and Luxembourg central banks — according to the ECB’s latest disclosures.

Out of the 25 council members, 11 had no individual investments to declare, while six invested only via funds. ECB president Christine Lagarde had investments in a French equity fund and a German bond fund as well as an unlisted French real estate company.

Eight disclosed direct investments in companies’ shares or in government bonds. The Cyprus and Malta central bank governors held their countries’ sovereign bonds, which the ECB is buying.

Constantinos Herodotou told the FT he had bought the bonds before he became governor of the Central Bank of Cyprus and joined the ECB council in April 2019, when the holdings were “disclosed in full detail” and vetted by the ECB ethics committee. Since then, he said, “not a single trade has been made on any of my holdings”.

Edward Scicluna, governor of the Central Bank of Malta, told the FT that his bonds were held jointly with his spouse and were bought “many years” before he was appointed this year. “None of them have ever been, or will ever be, actively managed or traded,” he said. “They are all being successively liquidated on maturity.”

There is no suggestion of any wrongdoing by Schnabel, Herodotou or Scicluna and the ECB only requires its staff to seek prior approval from its compliance office for any transactions in eurozone government bonds that are worth more than €10,000.

However, Alessia Del Vasto at the campaign group Positive Money Europe, said the Fed’s new rules “should be looked at closely” by the ECB, which only requires that most other share and corporate bond trades worth more than €10,000 be reported by its staff up to 30 days later.

In addition, the ECB said some eurozone national central banks allow staff to invest in financial institutions — something staff at the ECB and most other central banks are barred from. The BoE, the Swiss National Bank and the Bank of Canada also do not disclose top officials’ investments.

Like the Fed, the BoJ and the SNB clamped down on personal trading by officials after being burnt by scandal.

The BoJ tightened its restrictions after Toshihiko Fukui, its former governor, apologised for having invested ¥10m in the Murakami Fund, whose founder Yoshiaki Murakami was convicted of insider trading in 2007 and given a suspended prison sentence.

The SNB restricted the investment activities of senior staff and their spouses in March 2012, following an insider trading scandal that led to the resignation of Philipp Hildebrand as its governor. Hildebrand’s wife was revealed to have profited from buying $500,000 of US dollars shortly before the central bank intervened to send the Swiss franc down sharply.

Under the SNB’s new rules, its governors, deputies and senior management are allowed to invest only in bank deposits, pooled investment schemes such as mutual funds, pension funds, or property. Like the Fed’s new rules, they are not allowed to own individual stocks or bonds.

The Bank of Canada told the FT it was “monitoring developments at the Fed and we will assess to what extent any of their changes should be reflected in our own restrictions” as part of a regular annual review of its conflict of interest and ethics guidelines.

Additional reporting by Sam Jones in Zurich, Robin Harding in Tokyo and Chris Giles in London

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