$4.2 billion FX fines are just the beginning
Investment banks are keen to close the chapter on the foreign-exchange rate-rigging scandal after Wednesday’s announcement of regulatory fines totalling $4.2 billion, but more banks are expected to be fined and industry participants believe other nefarious practices should now be thoroughly investigated.
Citi, HSBC, JPMorgan, RBS and UBS were collectively fined £1.1 billion ($1.7 billion) from the UK’s Financial Conduct Authority (FCA) for failing to control business practices in their G10 spot FX trading businesses, and $1.4 billion by the US Commodity Futures Trading Commission for attempted manipulation of foreign-exchange benchmark rates.
In addition, the US Office of the Comptroller of the Currency fined JPMorgan, Citi and Bank of America $950 million for unsafe or unsound practices, and the Swiss Financial Market Supervisory Authority fined UBS CHF134 million ($138 million) for violating the requirements of proper business conduct.
UBS’s group chief executive officer Sergio P Ermotti described the fines as “an important step in our transformation process and towards closing this industry-wide matter for UBS”.
The FCA found that the five banks shared information about their client activity through various tight-knit groups, such as “the three musketeers”, “one team, one dream” and “the A-team”, to name a few.
They used the information to work out trading strategies and then attempt to manipulate fix rates, such as the 4pm WM/Reuters fix. Traders wanted to ensure that rate at which they 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, to gain profit.
'22 the rate'
On one particular day, Citi attempted to manipulate the European Central Bank (ECB) fix in the EUR/USD currency pair, the most commonly traded pair in the world. The bank had net client buy orders at the fix, which meant it stood to benefit if it could move the ECB fix rate higher.
Traders at five firms, including Citi, shared information about client orders ahead of the ECB fix at 1:15pm.
Some of the firms transferred their net buy orders to Citi ahead of the fix, which they described as “giving you the ammo” or “building”, thus increasing the volume that Citi needed to buy at the fix.
Between 1:14:29pm and 1:15:02pm, Citi bought €374 million on EBS’s trading platform, accounting for almost three-quarters (73%) of all purchases on the platform.
These large orders were placed to improve the chance that the first trade on the EBS platform at 1:15:00pm, which the traders believed was the basis for the ECB fix, was at a higher level.
Sure enough, the first trade for EUR/USD on the EBS platform was 1.3222 and the ECB subsequently published the fix rate for EUR/USD at 1.3222. Citi made a profit of $99,000 from ensuring that the fix rate at which it would sell euros was higher than the rate at which it bought euros on EBS.
The FCA also found evidence of attempts to trigger client stop-loss orders by manipulating the spot FX rate so that stop-loss orders would be triggered. This would profit the banks because they would have sold their clients a currency at a higher rate, before the stop-loss order, than it had bought that currency in the market.
The FCA is still probing Barclays’ G10 spot FX trading business, and has progressed its investigation to include its “wider FX business areas”. Deutsche Bank will not be fined by the FCA, but still faces investigation by regulators in Germany and the US.
The UK’s Serious Fraud Office is also in the midst of a criminal investigation, while the US Department of Justice is investigating excessive mark-ups on currency deals.
Concerns about banks adding too many basis points to the spread on currency deals has spawned the proliferation of transaction cost analysis and live benchmark solutions, to provide greater clarity on the true cost of a currency trade.
The practice of ‘last look’ in foreign exchange has also come under fire from market participants, who are calling for regulators to pay closer attention. ‘Last look’ allows market makers, typically banks, to pull a price from a platform even after a customer has clicked on it. Some platforms have banned the practice, but it is still widespread.
Andy Woolmer, managing director of New Change FX, says: “In theory the practice of last look has been grudgingly accepted to encourage liquidity providers to distribute their prices across multiple electronic trading venues. In practice, last look creates an informational asymmetry that liquidity providers have been too eager to exploit.”
James Kemp, managing director, global FX at the Global Financial Markets Association, says that while investigations are ongoing, the settlements and the proposed remediation programme provide a blueprint for the industry to move forward and to implement changes to restore confidence in the FX market.
Wednesday’s fines are simply a taster of what is to come.