Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Five banks to pay $4.3 billion in global settlement for attempted forex manipulation, (Nov 12, 2014)

By Lene Powell, J.D.

Joining other global and domestic regulators, the Commodity Futures Trading Commission (CFTC) slammed five banks with fines ranging from $275 million to $310 million each for trying to manipulate the global foreign exchange (FX) benchmark rates to benefit the positions of certain traders. Combined with fines by the Office of the Comptroller of the Currency (OCC), U.K., and Swiss authorities, the banks were ordered to pay about $4.3 billion in total, of which the CFTC’s portion was $1.5 billion.

The FX benchmarks are used to establish the relative values of different currencies and are referenced in pricing of many derivatives instruments including cross-currency swaps, foreign exchange swaps, spot transactions, forwards, options, and futures. According to CFTC enforcement director Aitan Goelman, 85 to 90 percent of FX transactions involve the U.S. dollar on one side, so there is a “profound” effect on the U.S. economy from manipulation of this market.

“Integrity of the market place is a paramount concern to the CFTC, and today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated,” said CFTC Chairman Timothy Massad.

The fix. The attempted manipulation was perpetrated by FX traders at each bank. One of the main FX benchmark rates that the FX traders attempted to manipulate was the World Markets/Reuters Closing Spot Rates (“WM/R Rates”). The WM/R Rates are used to establish the relative values of different currencies and reflect the rates at which one currency is exchanged for another currency. The WM/R Rates are the most widely referenced FX benchmark rates in the United States and around the world, and are used to price many transactions. Values fluctuate throughout the day, and rates are set or “fixed” based on trading activity of market participants at various times. The most widely used WM/R Rate is set or fixed at 4 p.m. London time (“4 p.m. WM/R fix”).

According to the orders, certain FX traders at UBS and other banks coordinated their trading to try to manipulate certain FX benchmark rates, including the 4 p.m. WM/R fix, to their benefit. Unlike the interest rate benchmark LIBOR, the WM/R benchmarks are based on observable transactions during a small window of time. The FX traders used private electronic chat rooms to coordinate their attempts to manipulate the FX benchmark rates for certain currency pairs, including the U.S. Dollar, Euro, and British Pound Sterling. They shared confidential customer order information and trading positions, changed trading positions to accommodate the interests of the collective group, and agreed on trading strategies as part of an effort by the group to attempt to manipulate certain FX benchmark rates. In some cases they pushed the rates downward, and in some cases upward.

For example, if a trader had fix orders in the opposite direction to the chat room group’s overall net fixing position approaching the fixing window, he might transact before the fix period with traders outside the private chat room in a practice called “netting off.” If chat room traders had net orders in the same direction as they desired the rate movement at the fix to be, then they would either (1) match off these orders with traders outside of the chat room in an attempt to reduce the volume of orders in the opposite direction transacted during the fix period; (2) transfer their orders to a single trader within the chat room who could then execute a single order during the fix period; or (3) transact with traders outside of the chat room in order to increase the volume traded by chat room members during the fix window in the direction favored by the private chat room traders.

In one chat session, after the fixing window closed, one trader said “nice call” and the chat room members gave their “scores” or profits from the fix. The chat room members each claimed they made between $60,000 and $220,000.

Penalties. The FINMA fine, which was only for UBS, was CHF 134 million, while the UK penalties amounted to £1.1 billion for all five banks. Martin Wheatley, chief executive of the FCA, said, “Today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right.”

The OCC assessed $950 million in fines against three banks: $250 million assessed against Bank of America, $350 million against Citibank, and $350 million against JPMorgan Chase Bank. The settlements included cease and desist orders requiring the banks to correct deficiencies and enhance oversight of their FX trading activity. Comptroller of the Currency Thomas J. Curry stated, “The enforcement actions we are issuing today make clear that the OCC will take forceful action, not only when the institutions we supervise engage in wrongdoing, but when management fails to exercise the oversight necessary to ensure that employees follow laws and regulations intended to protect customers and maintain the integrity of markets.”

The CFTC penalty amounts were $310 million each for Citibank and JPMorgan, $290 million each for RBS and UBS, and $275 million for HSBC. The banks also agreed to take measures to correct the problems and report on their remediation efforts within 120 days. The CFTC declined to comment as to whether penalties would be sought against individual traders or additional banks.

In arriving at the CFTC penalty amounts for each bank, Goelman said that although the conduct was “exceedingly egregious and brazen,” the CFTC took into consideration the fact that the banks cooperated in the investigation, took remediating steps, and settled early in the process. At least one bank self-reported the traders’ conduct. Aggravating factors were also considered, such as the frequency of misconduct, whether the bank had a leadership role, how high in the bank the traders were, and how many people in each bank were involved. The settlements were reached without admission of wrongdoing, which Goelman noted was the case in the “overwhelming majority” of CFTC settlements, adding, “That’s part of the settlement process.”

UBS said it continues to cooperate with ongoing FX and related investigations, including investigations of individuals. RBS said it continues to undertake a thorough investigation and has taken action to significantly strengthen systems and controls in its FX business.

The CFTC orders are: No. 15-03 (Citibank, N.A.), No. 15-04 (JPMorgan Chase Bank, N.A.), No. 15-05 (The Royal Bank of Scotland plc), No. 15-06 (UBS AG), No. 15-07 (HSBC Bank plc).

The OCC orders are: Bank of America: Consent Order, CMP; Citibank: Consent Order, CMP; JPMorgan Chase Bank: Consent Order, CMP.

Companies: Citibank, N.A.; JPMorgan Chase Bank, N.A.; The Royal Bank of Scotland plc; UBS AG; HSBC Bank plc

News: Antitrust