Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Commercial banks alleged to have colluded to manipulate foreign exchange rates, (Nov 5, 2013)

By Tobias J. Gillett, J.D., LL.M.

A pension fund has filed a complaint in the federal district court for the Southern District of New York on behalf of a putative class of individuals and entities that directly traded foreign currencies with certain major commercial banks, alleging that traders at the banks colluded to manipulate the global standard WM/Reuters Rates for determining exchange rates for different currencies, permitting the banks to profit at the expense of their clients (Haverhill Retirement System v. Barclays Bank PLC, filed November 1, 2013).

The complaint asserts a claim for violation of Section 1 of the Sherman Act, and alleges that the defendants’ fraudulent concealment of the collusion would equitably estop the defendants from asserting any statute of limitations as a defense to the claims. It seeks a declaration that the defendants’ actions violated the law, damages and treble damages, costs of suit, attorneys’ fees, and any other just and proper relief.

State Street Trust disseminates WM/Reuters Rates for 21 major currencies, including U.S. dollars, the Euro, Japanese Yen, the British pound sterling, the Swiss Franc, the Canadian dollar, the Australian dollar, and the New Zealand dollar. The WM/Reuters Rates serve as a benchmark settlement price for trading in 158 currencies, and are used extensively in the operation of financial markets for uses such as valuing portfolios and funds that track global indexes and as a benchmark for currencies in contracts. They are calculated from bid and offer rates from order matching systems and actual trades executed from 30 seconds before a fix to 30 seconds after the time of the fix.

Spot foreign exchange trades are “transaction[s] between two counterparties to exchange sums of currencies on a settlement date in two bank business days via the exchange of bank deposits in the respective countries.” One party will provide a bid and ask quote, which the other party can either accept or reject. According to the complaint, if a spot dealing bank accepts such a quote, the bank will also enter into a mirror-image trade to offset the primary trade because spot dealers do not carry overnight risk and thus run their books “flat.”

Defendants Deutsche Bank, Citibank, Barclays, UBS, JPMorgan, Credit Suisse, and RBS are major commercial banks that allegedly dominate the foreign exchange market, with a combined market share of more than 60 percent. The market share of the 10 firms reporting the highest trading volumes in the U.S. market increased to 98 percent in 2013 compared to 91 percent in 2010, with the five largest firms accounting for 80 percent, up from 74 percent in 2010.

According to the complaint, the defendant banks colluded to manipulate the WM/Reuters Rates. The dealers would face uncertainty when making trades at the WM/Reuters Rates because they were median-calculated rates, and were therefore “off mark.” The dealers would thus risk losing money when making their offsetting trades to flatten the books. The dealers allegedly manipulated the WM/Reuters Rates to avoid this risk.

Traders at the defendant banks allegedly traded ahead of large client orders that were believed to move the market, thus permitting the banks to profit or avoid losses. The traders allegedly would manipulate the rates by pushing through a high number of low-volume trades in the one-minute period before the WM/Reuters Rates were calculated, a process known as “banging the close.” Making such trades could artificially increase or decrease an exchange rate by hundredths of a percent, and could result in an approximately 100 basis point deviation from the day’s exchange rate.

“For example, if a bank’s client has given instructions to sell $100 million of a particular currency, which by increasing supply of the currency would decrease its value in the market, the banker would sell his position at the high, earlier rate, timing his proprietary trade to maximally reduce the exchange rate, decreasing the selling price for his client’s currency, thus ‘trading ahead,’” the complaint explains. “[T]he banker could then buy up his client’s own currency for the lower price, go home, and do it all again tomorrow.”

The complaint cites e-mails and instant messages sent by spot currency traders at the defendant banks in which they communicated with each other to align strategy when their client orders matched enough to permit rate manipulation, and to obtain information about impending trades. The complaint notes that the banks have each been reported to have suspended or dismissed traders in their foreign exchange divisions. The traders allegedly referred to themselves in chatrooms by various names, including “The Bandits’ Club,” “The Cartel,” “The Club,” and “The Dream Team.”

The complaint notes that various authorities have opened criminal investigations into possible manipulation of the $5.3 trillion-a-day foreign exchange market, including the Department of Justice, the Commodity Futures Trading Commission, the United Kingdom’s Financial Conduct Authority, the Swiss Financial Market Supervisory Authority, the Hong Kong Monetary Authority, the Singapore Monetary Authority, and European Union antitrust regulators.

The case is No. 1:13-cv-07789-ER.

Attorneys: Joseph P. Guglielmo (Scott+Scott, LLP) for Haverhill Retirement System.

Companies: Haverhill Retirement System; Barclays Bank PLC; Citigroup, Inc.; Citibank, N.A.; Credit Suisse Group AG; Deutsche Bank AG; JPMorgan Chase & Co.; Royal Bank of Scotland Group, PLC; UBS AG

News: Antitrust