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LONDON (Reuters) - Governments should not leap into full-scale regulation of currency trading in the wake of claims leading banks rigged market benchmarks, a member of the UK parliament committee overseeing the financial sector said on Friday.
Banks and other institutional players in the foreign exchange industry are watching global regulators nervously for signs of any appetite for a shake up of what to date has been the world's biggest self-regulated financial market.
They say putting currency trading on the sort of exchanges used for shares, derivatives and other globally-traded assets, or simply regulating it more heavily, would only drive up costs in a market which has grown steadily more efficient for business over the past decade.
Andy Love, a member of the British parliament's Treasury Select Committee, said that as long as the industry took steps itself to reform the issues around "fixing" benchmarks and possible collusion at the center of the scandal, there should be no rush to regulate the market heavily.
"I think only in the circumstances where it was felt that the damage to public confidence was so great and the response of the industry so limited, would it be felt that regulation was warranted," Love said.
No plans for regulating the forex market have been put forward so far in Europe but any settlements by banks for manipulating forex benchmarks would almost certainly trigger steps to change that piece of the market, as it did when lenders were fined for rigging the Libor benchmark interest rates.
Momentum for new rules could build when the European Union resumes work in the autumn on a law to regulate benchmarks, and the G20's Financial Stability Board reports in coming months on Libor and forex markets.
But the head of Britain's Financial Conduct Authority (FCA), Martin Wheatley, said last year that it would be a big step for regulators to decide that forex needed to be a formally regulated market.
"If it's necessary in order to have the trust and confidence for the market place to be regulated then so be it," Love said.
"But I think we need to wait and see how the industry responds and how deep the forex scandal goes before we decide if a regulatory response is the appropriate one."
(Reporting by Patrick Graham and Huw Jones; Editing by Toby Chopra)