Both banks are launching internal investigations to facilitate cooperation with regulatory bodies.

Swiss banking heavyweight UBS and foreign exchange markets giant Deutsche bank have reported separately in their quarterly earnings reports on Tuesday, that the banks have received inquiries from their regulators regarding the way they conduct foreign exchange transactions. Regulators across the globe, starting with the UK, US, Switzerland and Hong Kong are now deep into investigating potential manipulation of forex market rates.

The main target of the investigations are the rates around the 4 p.m. London “fix”. As we have recently reported, the regulators were already looking at instant messages written by traders in trader chat rooms with rather bizarre monikers – “The Bandits’ Club” and “The Cartel”.

UBS announced that it is already conducting its own internal review following the inquiry by the regulators and did say that the bank has already taken and will continue taking appropriate action regarding certain members of its personnel as a result of the ongoing review. Deutsche Bank said that after receiving information requests by certain authorities it is fully cooperating and cannot comment much more, since the investigations are at an early stage.

However difficult it might be to believe, there may be some meat behind these investigations. The forex market that is trading more than $5 trillion daily may not be immune to dodgy trading schemes by the biggest FX dealers in the world. This is further explaining why there is a growing trend of institutional players preferring the services of ECNs and the institutional trading arms of firms such as FXCM (NYSE:FXCM) and Gain Capital (NYSE:GCAP). It suddenly becomes an obvious choice instead of putting orders through the old school investment banks’ foreign exchange dealing desks.

With direct knowledge about institutional orders, a cooperating scheme by dealers at the major banks are just as likely to be found guilty of foreign exchange rates manipulation as they were last year, when the LIBOR rate fixing scandal came to light. It was last year when UBS has paid a $1.5 bln fine to British, Swiss and US authorities for manipulation of the LIBOR rate, if these allegations gain substance, the shareholders of the Swiss bank could be in for another nasty surprise, which was confirmed with its share prices trading more than 7% lower in Tuesday trading.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.