Anthony Grabiner, speaking to British lawmakers, said care should be taken not to undermine the effectiveness of London as a centre for foreign exchange trading.

"But the mere fact that the behaviour, which has been identified by the FCA (Financial Conduct Authority), is in fact going on, demonstrates that there needs to be some regulation of this marketplace," he said.

Grabiner said the issue was being looked at by the FCA, one of Britain's financial market regulators, and by Bank of England Deputy Governor Minouche Shafik who is due to present a report on how markets should be governed in June.

"My own view is that you cannot leave a market of this size in an unregulated form," he said.

Grabiner, a leading London barrister, was talking to lawmakers about his investigation into the role of the Bank of England in the foreign exchange case. The Bank dismissed its chief foreign exchange dealer, Martin Mallett, as the review was published in November. [ID:nL6N0T242H]

Grabiner said Mallett had failed to tell managers of his "serious concerns" about the exchange of information by traders at banks because he felt he would be embarrassed if he had to share it with regulators who would be very worried about it.

"It was apparent that although that was his concern, he kept it within his own breast," Grabiner said. "That is the reason why my conclusion was that it was not appropriate to criticise people above him or below him, because he kept it to himself."

Six banks were fined a total of more than $4 billion in November for failing to stop traders trying to manipulate currency markets.

In his report published last year, Grabiner said there was no evidence any Bank official had been involved in unlawful behaviour in relation to the FX investigation.

In a testy exchange on Wednesday, he rejected suggestions by a lawmaker that he should have pressed Mallett more about a conversation that Mallett had with a bank trader who seemed concerned about possible market manipulation by other traders before apparently backing off that view in the exchange.

“You simply pick out a little nugget and tell me what you think it means and all I am respectfully suggesting to you is that you may actually be wrong and I may actually be right,” Grabiner said.

The chairman of the committee said he would seek further documentation from Grabiner relating to what Mallett told him about the discussion with the unnamed bank trader.

(Reporting by William Schomberg; Editing by Catherine Evans/Hugh Lawson)