Another day, another FX settlement. What’s new? Well, actually a lot. The recent settlements, when you dig into them, provide a whole new array of material. First we will explore the background, and then we’ll get you to the new…
The latest settlements between FX banks and regulators were filed on May 20. Five banks agreed to pay approximately $5.6 billion in fines to US and UK regulators relating to the rigging of FX rates, including several fix benchmark rates. JPMorgan, Citi, Barclays and RBS plead guilty to criminal charges for having “entered into and engaged in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers … in the foreign currency exchange spot market.” UBS avoided a guilty plea, and was only fined for breaking a prior non-prosecution agreement relating to LIBOR misconduct, as a reward for being the first to inform regulators of these FX activities.
A Bloomberg news story in June 2013 provided the initial public information that there was a potential problem with FX benchmark fixes, particularly the WM Reuters London Fix. Since then numerous news stories and the November 2014 settlements with the CFTC, OCC, FCA (UK regulator) and FINMA (Swiss regulator) have described the communications between bankers at several major banks, conniving to rig FX benchmark rates -- including their use of group chats to share information on the fix trades that they would need to execute. These traders would communicate each other’s currency positions and customer orders for the upcoming fix and then determine the means to trade off of this information so that the banks could make profits at the expense of their customers. Some of the settlements provide examples of chat room conversations in which traders from multiple banks collude to manipulate the fix.
This collusion at the London Fix is the focus of news reports and the regulators’ settlements with banks for good reason: fix trading constitutes a major portion of daily FX spot trading; fix rates are used world-wide to price many widely-held assets including mutual and pension funds; collusion is illegal and easily shown to have occurred based upon chat room communications; and the names of the chatrooms (e.g., the Cartel, the Mafia), and the lingo used within, make for entertaining media.
New Revelations
New areas of misbehavior are revealed in the new set of settlements and pleas. There is much less awareness of these than the fix-specific misconduct, so we’d like to underscore some of the more egregious patterns of behavior.
This time around, the New York State Department of Financial Services (NY DFS) gets in on the act as well, tagging Barclays with a Consent Order. The NY DFS sheds light on some areas that are not covered in other plea agreements or settlements. For example, it stipulates that “Barclays conspired with other banks in order to coordinate trading … coordinate bid/ask spreads charged.” [1]
The DFS also highlights Barclays’ “misleading sales practices”[2] , as well as the fact that “The misconduct described in this Order was not confined to a small group of individuals; it involved more than a dozen employees, who acted with the knowledge and oversight of some senior desk managers, and spanned geographically across numerous countries.”[3] Moreover, the DoJ and DFS agreements include broader time ranges of misconduct than some of the earlier settlements, such as the CFTC’s.[4]
So…what other wrongdoings were these FX trading engaged in?
Manipulation of Spot Market to Profit from Client Orders
Clients leave orders with their FX banks to execute FX spot trades, in order to manage their risks from future spot moves.
Banks have admitted to manipulating FX rates when near the order levels, in order to increase the banks’ profit at the customer’s expense. For example, banks admitted to “accepting limit orders from customers and then informing those customers that their orders could not be filled … when in fact the defendant was able to fill the order but decided not to do so because the defendant expected it would be more profitable not to do so….”[5]
Likewise, NY DFS notes that Barclays told “clients that their orders had been only partially filled, when in fact the FX Sales employees were holding back a portion of the fill as the market moved in Barclays’ favor….”[6]
Providing Quotes with Dealer Markup to Clients Expecting to Hear “Direct Trader Quotes”
On large trades, some clients insist on hearing quotes not from their salesperson (who might add a spread to a trader quote), but directly from the bank trader over a phone line. Clients would expect these to be market-based -- and not shaded in one direction based upon the direction of the client’s intended trade. However, bank traders shaded the quotes either based upon hand signals from the salesperson indicating the direction and the size of the markup to include, or based upon earlier agreements made between the two bank employees.
On this count, banks admitted to “including sales markup, through the use of live hand signals or undisclosed prior internal arrangements or communications, to prices given to customers that communicated with sales staff on open phone lines….”[7]
Disclosure of (Confidential) Customer Identities and Trade Activity to Other Market Participants
Banks provided this information to other banks and even other customers, on both large fix and non-fix trades. According to the plea agreements, the banks disclosed “non-public information regarding the identity and trading activity of the defendant’s customers to other banks or other market participants….”[8]
Trade Platform Provided Altered Rates to Certain Customers
The settlements were unclear on the relationship between the platforms and the bank, but platform rates provided to certain customers were systematically favorable to the bank versus the unaltered rates. RBS engaged in “intentionally altering the rates provided to certain of its customers transacting FX over a trading platform disclosed to the United States in order to generate rates that were systematically more favorable to the defendant and less favorable to customers….”[9]
Trading Ahead of a Corporate Transaction
We find a new anecdote of RBS trying to move the currency rate ahead of a corporate transaction so as to favor the bank at the client’s expense. This is commonly known as front running.
From the plea agreement: “… in connection with the FX component of a single corporate transaction, trading ahead of a client transaction so as to artificially affect the price of a currency pair and generate revenue for the defendant, and to affect or attempt to affect FX rates, and in addition misrepresenting market conditions and trading to the client….”[10]
Manipulation of Emerging Markets Currency Pricing
“Barclays FX traders exchanged information about customer orders with FX traders at other banks…”[11] For example, “a Barclays FX trader explicitly discussed with a JP Morgan trader coordinating the prices offered for USD/South African Rand to a particular customer, stating, … ‘if you win this we should coordinate you can show a real low one and will still mark it little lower haha.’”[12]
Conclusion
These regulatory investigations have uncovered several different means used by traders to increase bank profits to the detriment of their customers, including by “providing false and misleading information to customers and markets.”[13]
As opposed to the FX market convention of adding a spread on each trade to generate bank profit (controllable by customer scrutiny of the rates), these investigations opened the window to the various layers of deceptive practices prevalent in the FX market, and the abuse of client confidentiality and trust. While the FX market has begun adjusting to the misconduct around the 4pm WM/R London fix, it is not yet clear whether banks have begun (internally) investigating some of the newly highlighted misbehavior.
One additional feature of these settlements is the demand by regulators for additional compliance scrutiny of FX trading which will hopefully limit potential future misconduct. May we return all the stronger for it, and more robust!
About the Author
Jonathan Wetreich has spent 20 years in the foreign exchange markets, beginning on the buy side with the Treasury Group at Honeywell International. There he was responsible for managing the foreign exchange risk to this multinational firm, which included trading in spot, forwards and options. At Brown Brothers Harriman, a private bank, his sell side positions included consulting with the senior management of corporations to improve their foreign exchange risk management and execution. Jonathan also spent several years there on the foreign exchange trading desk, working primarily with asset management firms, as well as spending time as an FX strategist. Jonathan also assisted asset management firms in managing their passive hedge programs. Since 2012 Jonathan has been an independent consultant, primarily to corporations on matters of foreign exchange risk management. In addition, he has consulted on FX litigation and to organizations attempting to further their understanding of corporate hedge programs. Jonathan received an MBA from Columbia Business School.
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[1] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.1
[2] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.2
[3] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.6 ¶14
[4] FCA
“Relevant Period”: 1/1/2008 – 10/15/2013; CFTC “Relevant Period”: 2009 – 2012;
FINMA “Period under Investigation”: 1/1/2008 – 9/30/2013; OCC “Relevant
Period”: 2008 – 2013; Fed “Review Period”: 2008 – 2013; DoJ: 1/1/2008 and
1/1/2009 – 5/20/2015
[5] See
for example: Plea Agreement USA vs JPMorgan Chase & Co. p.17 ¶13
[6] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.16 ¶ 56
[7] See
for example: Plea Agreement USA vs Citicorp p.16 ¶13
[8] See for example: Plea Agreement
USA vs Barclays PLC p.18 ¶16
[9] Plea
Agreement USA vs The Royal Bank of Scotland PLC p.17 ¶13
[10] Plea
Agreement USA vs The Royal Bank of Scotland PLC p.17 ¶13
[11] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.11¶33
[12] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.11 ¶34
[13] NY DFS Consent Order, In the
Matter of: Barclays Bank PLC, p.2
