BNPP pays $246 million to settle Fed’s FX probe

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By:
Solomon Teague
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BNP Paribas (BNPP) is the latest bank to be fined by US regulators over misconduct in its FX business. The French bank now hopes to put the episode behind it, having restructured the relevant businesses and improved its compliance processes.

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The bank has settled with the US Federal Reserve board of governors over charges relating to misconduct in its foreign exchange business between 2007 and 2013.

The fine of $246 million is covered by existing provisions.

The Fed had found “deficiencies in BNP Paribas’ oversight of, and internal controls over, FX traders” trading US dollars and other currencies, both for the bank’s own accounts and on behalf of customers.

In particular it cited BNPP’s failure to detect or control traders discussing their positions with competitors using electronic chatrooms.

It stated that such communications between staff at different banks could lead to coordination of trading strategies to manipulate the market or the fixing price, reveal confidential information about client positions to competitors or comparisons of prices offered to clients.

BNPP has until October 15 to submit written plans acceptable to the Fed outlining how it will improve its internal controls and compliance programme, and compliance risk-management programme, as well as an internal audit. These must show, among other things, that BNPP has improved its senior management oversight of and controls over FX trading.

Steps taken

The bank has already taken some steps to improve oversight and reduce conflicts of interest. It is shifting its FX operation away from principal trading and towards an agency model, which, as well as helping reduce the bank’s balance sheet, it believes will reduce conflicts of interest in its relationships with clients.

BNPP has also introduced a code of conduct for its corporate and investment bank, and has increased the headcount in its compliance business as it beefs up surveillance – the bank says its compliance staff has more than doubled since the end of 2013.

It has also introduced mandatory training for employees to improve the culture of compliance among staff.

The Fed acknowledged these efforts and the bank’s full cooperation with its investigations, saying: “[BNPP] has made and continues to make progress in implementing enhancements to its firm-wide compliance systems and controls that are designed to address deficiencies in its Covered FX Activities,” it says.

In January, the Fed permanently banned former BNPP trader Jason Katz from the banking industry for his manipulation of FX prices, after he pleaded guilty to a criminal violation of US antitrust laws in his trading activity in US dollar and South African rand trades.

BNPP has been barred from re-employing Katz or other individuals implicated in its investigations.


Debate continues on the merits of shifting from a rule-focused compliance approach to an integrity-based approach that chief compliance officers would be expected to adopt 

Boston Consulting Group

And in May, the bank agreed a separate settlement relating to the same issue with the New York State Department of Financial Services.

In April, the Fed fined Deutsche Bank $156.6 million in two enforcement actions, with $136.9 million of that relating to “unsafe and unsound practices in the foreign exchange markets”.

BNPP’s fine is the latest in a series of fines issued to banks by global regulators. Since the 2007-2008 financial crisis and through to the end of 2016, banks have been fined roughly $321 billion, with $42 billion of that coming in 2016 alone, according to the Boston Consulting Group (BCG).

Worryingly for the FX market, it has been the subject of a substantial proportion of these fines.

While the majority of fines have been handed out by US regulators, European and Asian regulators are likely to increase their own activities, BCG adds.

However, while such fines for past behaviour have become a cost of doing business for banks, BCG expects “these costs to diminish as banks strengthen their compliance functions and overall risk management acumen”.

This is altering the way banks approach business, says BCG, but the industry has further to go to create an environment in which these problems do not reoccur.

“Strong central capabilities will be needed to ensure compliance at branches and, especially, subsidiaries,” it states.

“Debate continues on the merits of shifting from a rule-focused compliance approach – based on definitions of financial crime and of appropriate market and customer conduct – to an integrity-based approach that chief compliance officers would be expected to adopt.”

In the FX markets, there is already evidence of a shift in this direction with the global code of conduct, although it is early days for this initiative and it remains to be seen how effective it will be in ensuring the FX market is not drawn into further scandals in the future.