Last week, it emerged that JPMorgan will pay around $100 million to settle a lawsuit from investors against 12 leading banks for attempting to manipulate the foreign exchange market, according to a letter filed with the United States Courthouse in New York.
The remaining defendants are Bank of America, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland and UBS. The lawsuit alleges that the 12 banks colluded to manipulate FX benchmark rates – the WM/Reuters rates – to the detriment of their counterparties.
The settlement comes after Citi, HSBC, JPMorgan, RBS, UBS and Bank of America were fined $4.2 billion by regulators around the world for attempting to manipulate foreign exchange benchmarks.
Michael D. Hausfeld, lawyer and chairman of US law firm Hausfeld that is representing the claimants, says that last week’s settlement has prompted a wave of interest from dozens of potential new claimants.
“Interest has increased since the announcement of the settlement. They range from businesses, such as industrials, to other financial institutions, to general investors,” says Hausfeld.
"It is going to take some time to evaluate their claims, but they should be imminent. I think clients are seriously undertaking consideration of pursuit of these claims, and their inclinations right now are more heavily in favour of doing so.”
|Michael D. Hausfeld|
Hausfeld says that claimants will seek to identify transactions that were affected by benchmark rigging and compare them with what the exchange rate would have been but for the collusion.
Hausfeld draws parallels between the foreign exchange manipulation lawsuit and those concerning Libor manipulation, describing a similar kind of “misconduct”.
In October, Barclays agreed to pay almost $20 million to settle a US class action against 16 banks alleging manipulation of the Libor benchmark interest rate, which was the first such settlement in the US. The settlement related to investors who traded Libor-based eurodollar futures contracts or options on exchanges and believed they were negatively affected by Libor rigging.
Meanwhile, Barclays UK also reached a settlement last year with UK-based Guardian Care Homes worth about $60 million. Guardian had accused the bank of mis-selling interest-rate derivatives while simultaneously attempting to manipulate Libor.
The decision by JPMorgan to settle the foreign exchange lawsuit represents a new precedent, says Hausfeld.
“[The] settlement creates a break in an otherwise traditional line of refusal by banks to respond to [allegations of] benchmark rigging,” he says.
Pierre Pourquery, partner in financial services at audit firm Ernst & Young (EY), says that corporates are now investigating whether or not to sue the banks for attempting to manipulate foreign exchange rates.
EY is advising banks on how to build a safer trading environment to ensure this type of manipulation is not repeated, particularly in light of stringent new rules that are coming into force, according to Pourquery.
The UK’s Financial Conduct Authority is introducing its new Senior Managers and Certified Person Regime this year, which will replace the existing Approved Persons Regime with stricter rules on individual accountability.
The new rules reverse the burden of proof, effectively removing the presumption of innocence until proven guilty. A senior person can be guilt of misconduct if a contravention occurs in an area for which they are responsible unless they can prove they took reasonable steps to avoid the contravention.
“[It is] up to bank to demonstrate they have the right controls, environment and culture [rather] than regulators proving they don't have that,” says Pourquery.
The new regime is expected to come into effect in the final quarter of the year. HM Treasury is also considering extending the rules to senior managers at UK subsidiaries of foreign banks.
Meanwhile, regulators are continuing to investigate foreign exchange markets, particular derivatives trading. The practice of barrier running is coming under scrutiny and could lead to future litigation against the banks, but options traders insist there are crucial differences between the nature of barrier running and benchmark manipulation.
Barrier running is a temptation for both buyers and sellers of foreign exchange derivatives, whereas the finger of blame for benchmark manipulation is pointed solely at the banks.