Barclays, HSBC RBS plan £1 billion provision in Q3 for settlement of FX rigging probe


Just over a year has passed since a succession of global financial regulators, government departments and senior lawmakers embarked on investigating the world’s bank FX desks for alleged manipulation of FX benchmarks, resulting in an inconclusive and high profile chain of events that have punctuated not just the financial news, but mainstream news to boot.

Quite clearly, if any of the large FX dealers which are involved are implicated and the range of class action lawsuits and impending prosecutions come to fruition, the cost to the major global banks will be tremendous, and with Barclays, HSBC and RBS part of a global elite which handle the majority of FX order flow based in London, the UK’s bank FX industry is one of the major betes noires of the investigators.

Today, these three financial giants have made provisions to set aside approximately $1 billion for potential settlements with regulators during the next week as the firms prepare their accounts for the announcement of their corporate results for the third quarter of 2014.

Whilst making such provision is not necessarily a new development, Deutsche Bank being among the first to do so earlier this year, such a vast sum is congruent with previous allocations for settlements by banks anticipating censuring should the probe into FX benchmark manipulation fall against them.

Deutsche Bank’s provision amounted to $2.7 billion alone, which included legal provisions for what it considered could be a series of fines.

It could be proffered that companies in Britain may suffer a financial blow but not a criminal one, as the Financial Conduct Authority (FCA) recently stated that 97% of cases that it brings against industry participants are settled ahead of any proceedings, with the FCA often closing the cases on receipt of a financial settlement. Therefore, it is poignant to consider whether, if any FX benchmarks had been manipulated, this activity had benefited these three British banks to a greater amount than £1 billion, and therefore should the FCA accept a settlement and close its file, the banks are still ahead.

In North America, matters are somewhat different. Often, settlements are not presented by firms, instead litigation continues and often results in court cases, the results of which are documented and publicly available via various government department sources.

On this basis, a dynamic that is worthy of consideration is that whilst European banks set aside large capital sums in preperation for potential appeasement of regulators by way of settlement, North America’s financial giants are concentrating on litigation whilst the authorities work in conjunction with the Federal Bureau of Investigation (FBI) in an attempt to bring criminal prosecutions to fruition.

According to a report today by Sky News which revealed details of discussions between the industry participants and the FCA alongside authorities in the United States, it became apparent that the aggregate penalty for the six banks from the FCA would be lower than the £2bn indicated a few weeks ago.

The report continued to detail that the so-called omnibus settlement, which the banks have been keen to coordinate with the FCA, will be the largest collective penalty ever imposed by the City watchdog.

The FCA is expected to find the banks guilty of a string of systems and control failures in their foreign exchange businesses following the emergence of concerns that currency markets had been manipulated in a similar way to interbank borrowing rates such as Libor.

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Barclays, HSBC RBS plan £1 billion provision in Q3 for settlement of FX rigging probe

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