November 18, 2014

Six banks to pay $4.3 billion in global foreign exchange manipulation settlement

In our latest banking bulletin, we covered the enquiry into the manipulations of the foreign exchange markets (in our article entitled FOREX Scandal).  Since going to press there have been significant developments as the regulators have issued their first wave of fines to some of the banks that they believed were involved in the manipulation.

The regulators that have issued fines:

The fines were announced by the following regulators:

  1. US regulators: (i) The Commodity Futures Trading Commission and (ii) the Office of the Comptroller of the Currency (“OCC”);
  2. UK regulator: the Financial Conducts Authority (“FCA”); and
  3. Swiss regulator: FINMA.

Who has been fined so far and how much in total

JPMorgan – over $1 billion
Citigroup – over $1 billion
UBS - $800 million.
RBS - $634 million
HSBC - $618 million.
Bank of America - $250 million (but has only been fined by the OCC so far)

The FCA findings and fines

The FCA provided a 30% discount to banks that settled early resulting in fines totalling £1,114,918,000 ($1.7 billion) instead of £1,592,740,000 ($2.5 billion).

The breakdown of the FCA fines is as follows:

UBS - £233,814,000 ($371 million)
Citibank - £225,575,000 ($358 million)
JP Morgan - £222,166,000 ($352 million)
RBS - £217,000,000 ($344 million)
HSBC - £216,363,000 ($343 million)

In addition to taking enforcement action against and investigating the six firms where the worst misconduct was found, the FCA is launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. The FCA will require senior management at firms to take responsibility for delivering the necessary changes.

The FCA’s findings showed that between 1 January 2008 and 15 October 2013, ineffective controls at the banks covered allowed foreign exchange traders to put their banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.

Traders behaved unacceptably by sharing information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate foreign exchange currency rates, in collusion with traders at other firms.

Traders attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought that currency for in the market. If successful, the bank would profit.

Firms can legitimately manage risk associated with client orders by trading in the market and may make a profit or loss as a result. It is completely unacceptable, however, for firms to engage in attempts at manipulation for their own benefit and to the potential detriment of certain clients and other market participants.

In setting the fine for each bank the FCA considered, amongst other things, the bank’s relevant revenue, the seriousness of the breach, each bank’s disciplinary record, the degree of co-operation shown by each bank, and knowledge and/or involvement of those responsible for managing this part of the bank’s business.

The fines are the largest ever imposed by the FCA (or its predecessor, the Financial Services Authority) to reflect specifically the seriousness of the risks posed to a systemically important market and the failure across the industry to learn the necessary lessons about tackling these risks, given the similar failings which arose in the context of LIBOR.

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