FX rigging: Barclays feels the heat
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Foreign Exchange

FX rigging: Barclays feels the heat

Barclays has suffered the biggest blow in the latest round of billion-dollar regulatory fines for rigging currency markets, with a penalty of almost $2.4 billion from five regulators, with the spotlight shifting to FX options.


UK and US regulators fined five banks $5.7 billion on Wednesday, bringing total penalties so far to $9 billion.

Barclays was fined the biggest charge ever imposed by the UK's Financial Conduct Authority of £284.4 million, for failing to control business practices in its foreign exchange business in London.

The FCA found that failings in Barclays' FX business persisted, despite being investigated and fined for similar control failings in relation to Libor and the gold fixing. The bank was found to have not taken adequate steps to address the underlying root cause of the failings in its FX business.

Antony Jenkins, chief executive officer at the bank, says: "The misconduct at the core of these investigations is wholly incompatible with Barclays' purpose and values and we deeply regret that it occurred."

The FCA identified failings throughout Barclays' voice trading FX business and beyond G10 spot FX trading into emerging markets spot FX trading, options and sales.

The main findings were that traders at the bank attempted to manipulate the WM Reuters and European Central Bank fix, triggered clients' stop-loss orders and inappropriately shared confidential information internally and with third parties about client orders.

This was done through tight-knit groups that communicated via electronic chat rooms, calling themselves names such as 'the players' and 'the 3 musketeers', with the mantra: 'We all die together'.

Spotlight shifts to FX options

In addition, the FCA found that staff in the bank's FX option business had the 'opportunity' to engage in attempts to manipulate fix or spot rates to benefit its trading positions in currency options, but to the potential detriment of its clients.

The practice, known as 'barrier running', has come under scrutiny from regulators. The Fair and Effective Markets Review is investigating, and its findings will be published next month.

Further reading


'Barrier running' investigation alarms FX traders

$4.2 billion FX fines are just the beginning

Certain forex options, including barriers and digitals, are binary, meaning that they either pay out sometimes substantial amounts or nothing at all, depending on the underlying spot rate of the currency pair that underpins the option.

This creates a temptation for buyers and sellers of these options to manipulate the spot market to ensure the spot rate moves in their favour.

The enforcement action reads: "Barclays’ control failings also meant that traders had the opportunity to benefit Barclays’ trading positions in FX options by attempting to manipulate fix or spot FX market rates to prevent Barclays’ clients from receiving pay-outs from the options they had purchased from Barclays."

Barclays conducted a risk assessment in 2013 of three foreign exchange businesses: EMEA G10 FX spot; G10 FX options; and EM FX. It identified a lack of formalised monitoring and surveillance, noting the risk with large FX barrier option trades "where derivative traders may seek to inappropriately influence spot traders to manipulate pricing in order to benefit options settlements”.

The FCA fined Citi, HSBC, JP Morgan, RBS and UBS £1.1 billion in November for failing to control business practices in their G10 spot FX trading divisions, but did not include a finding about the opportunity to conduct barrier running.

The FCA enforcement action against Barclays is different to the other enforcement actions last year, in that the systems and controls failings published in November applied to a narrower scope.

US hardline approach

US regulators have also flexed their muscles, meting out fines for FX manipulation to Barclays, Citigroup, JP Morgan Chase, Royal Bank of Scotland, Bank of America and UBS. The US Commodity Futures Trading Commission (CFTC), the New York State Department of Financial Services (DFS), the US Department of Justice (DoJ) and the Board of Governors of the Federal Reserve System announced the fines on Wednesday, highlighting that multiple regulators are taking the banks to task.

“The criminality occurred on a massive scale,” says Andrew McCabe, assistant director at the Federal Bureau of Investigation. “Traders at the banks communicated in code in chat rooms to set price-fixing on a daily basis.”

The DFS pinpointed traders using phrases such as: "If you ain't cheating, you ain't trying" to rig currency benchmarks.

"Put simply, Barclays employees helped rig the foreign exchange market," says Ben Lawsky, New York's superintendent of Financial Services. "They engaged in a brazen heads-I-win, tails-you-lose scheme to rip off their clients."

HSBC and Deutsche Bank are still being investigated by US regulatory bodies, including the DoJ and the DFS.

In addition, Barclays agreed with the CFTC to pay $115 million to settle claims it attempted to manipulate the US dollar ISDAfix benchmark. Meanwhile, UBS pleaded guilty to one count of wire fraud for its conduct in manipulating Libor, resulting in a $203 million fine.

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