US authorities close in on major banks, taking the total penalty to $3.3 billion


The high profile global investigation into FX rate manipulation by major banks has concluded with high fines from a series of national financial regulatory authorities. This morning, Switzerland’s FINMA concluded its findings with regard to practices at UBS, resulting in disgorgement and sanctions, and Britain’s Financial Conduct Authority (FCA) administered a gargantuan £1.1 billion fine to five banks.

However, the removal of large sums from the banks by regulators has not stopped there. On the other side of the Atlantic, the Commodity Futures Trading Commission (CFTC), has also brought its proceedings to a close, ruling that the same five banks that are subject to fines from the FCA must also pay penalties to the CFTC amounting to $1.4 billion, taking the total liability to these combined companies to $3.3 billion, the highest fiscal penalty ever administered to banks by regulatory authorities.

In this particular case, adding to the fines already imposed by the FCA, the CFTC’s ruling is that its imposition of $1.4 billion in penalties will be broken down as follows: $310 million each for Citibank and JPMorgan, $290 million each for RBS and UBS, and $275 million for HSBC.

The fate of Barclays is yet to be decided by the British and American authorities, and as part of the fallout from the conclusion of this case, the Bank of England has dismissed its chief foreign exchange dealer, Martin Mallett, who has worked at the bank for almost 30 years after Lord Grabiner had been placed in charge of investigating any potential wrongdoing by the British central bank. According to Lord Grabiner’s report, Mr. Mallett failed to bring to the attention of his superiors that senior currency traders were sharing information via messaging services regarding client orders.

According to Lord Grabiner, while the practice isn’t improper, it can “increase the potential for improper conduct,” Grabiner said. “Mallett did not escalate this issue to an appropriate person. This was an error of judgment for which he should be criticized” concluded Lord Grabiner.

With a large potential penalty still looming over Barclays, Bloomberg today reported that the FCA has made clear plans to “progress” its probe into Britain’s Barclays Plc, which wasn’t part of the settlement, to cover its wider foreign exchange trading business. Should this come to fruition, the total fine will likely be substantially higher.

“We will continue to engage with these authorities, including the FCA and CFTC, with the objective of bringing this to resolution in due course,” Barclays said in a statement.

The orders issued by the CFTC, like those of the FCA, also require the banks to cease and desist from further violations, and take specified steps to implement and strengthen their internal controls and procedures, including the supervision of their FX traders, to ensure the integrity of their participation in the fixing of foreign exchange benchmark rates and internal and external communications by traders. The relevant period of conduct varies across the Banks, with conduct commencing for certain banks in 2009, and for each bank, continuing into 2012.

Aitan Goelman, the CFTC’s Director of Enforcement, stated: “The setting of a benchmark rate is not simply another opportunity for banks to earn a profit. Countless individuals and companies around the world rely on these rates to settle financial contracts, and this reliance is premised on faith in the fundamental integrity of these benchmarks. The market only works if people have confidence that the process of setting these benchmarks is fair, not corrupted by manipulation by some of the biggest banks in the world.”

According to the Orders, one of the primary benchmarks that the FX traders attempted to manipulate was the World Markets/Reuters Closing Spot Rates (WM/R Rates).

The WM/R Rates, the most widely referenced FX benchmark rates in the United States and globally, are used to establish the relative values of different currencies, which reflect the rates at which one currency is exchanged for another currency.

FX benchmark rates, such as the WM/R Rates, are used for pricing of cross-currency swaps, foreign exchange swaps, spot transactions, forwards, options, futures and other financial derivative instruments. The most actively traded currency pairs are the Euro/U.S. Dollar, U.S. Dollar/Japanese Yen, and British Pound Sterling/U.S. Dollar. Accordingly, the integrity of the WM/R Rates and other FX benchmarks is critical to the integrity of the markets in the United States and around the world.

The Orders find that certain FX traders at the Banks coordinated their trading with traders at other banks in their attempts to manipulate the FX benchmark rates, including the 4 p.m. WM/R fix. FX traders at the Banks used private chat rooms to communicate and plan their attempts to manipulate the FX benchmark rates.

In these chat rooms, FX traders at the Banks disclosed confidential customer order information and trading positions, altered 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. These chat rooms were sometimes exclusive and invitation only. (Examples of the coordinating chats are attached).

The Orders also find that the Banks failed to adequately assess the risks associated with their FX traders participating in the fixing of certain FX benchmark rates and lacked adequate internal controls in order to prevent improper communications by traders.

In addition, the Banks lacked sufficient policies, procedures and training specifically governing participation in trading around the FX benchmarks rates; and had inadequate policies pertaining to, or sufficient oversight of, their FX traders’ use of chat rooms or other electronic messaging.

According to the Orders, some of this conduct occurred during the same period that the Banks were on notice that the CFTC and other regulators were investigating attempts by certain banks to manipulate the London Interbank Offered Rate (LIBOR) and other interest rate benchmarks.

The Commission has taken enforcement action against UBS and RBS (among other banks and inter-dealer brokers) in connection with LIBOR and other interest rate benchmarks. (See information below).

The Orders recognize the significant cooperation of Citibank, HSBC, JPMorgan, RBS, and UBS with the CFTC during the investigation of this matter. In the UBS Order, the CFTC also recognizes that UBS was the first bank to report this misconduct to the CFTC.

For the full report from the CFTC, click here.

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US authorities close in on major banks, taking the total penalty to $3.3 billion

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