Earlier
this month, on November 12, 2014, U.S., U.K., and Swiss regulators
have fined several investment banks for manipulating FOREX markets.
The
Fines
Let’s
first have a closer look at the fines:
Fines
are pretty evenly distributed among the banks. UBS stands out because
it not only settled with U.S. and U.K. regulators but also with its
home regulator FINMA.
As
FOREX trading desks are mainly situated in London and New York, these
were also the main regulators involved. It stands out that U.K.’s
Financial Conduct Authority (FCA) was even more severe than its U.S.
counterpart, the Commodities Futures Trading Commission (CFTC).
FINMA, the Swiss financial markets regulator, however, didn’t
actually impose a fine in a narrow sense. It rather asks UBS to pay
back illegally obtained return and avoided costs.
In
total, fines amount to 3.3 bn USD. As a comparison, this represents
the fines of 28,000 aggravated thefts in France or 8 % of the
combined 2013 net income of the fined banks.
On
the merits
In
contrast to other financial litigation, this one is, in my view,
rather easy to understand.
On the
merits, there is one notable difference between CFTC’s approach on
the one hand and FCA’s / FINMA’s approach on the other hand:
Whereas in the U.S., there exists specific legislation forbidding any
willful manipulation of commodities’ (including FOREX) prices, the
U.K. and Swiss regulators did not invoke such legislation. Rather,
the latter sanctioned the banks on the grounds of violations of
general prudential requirements such as insufficient control systems
and negligence of client information confidentiality.
The
facts
Obviously,
the tedious work of regulators was here to establish the facts. In
the end, they gathered ample evidence from private electronic chat
rooms to show that traders manipulated, between 2008 and 2013, FOREX
fixings by sharing client information on upcoming trades and
coordinating trading strategies.
A USB
trader even wrote “Call me legend!! Front
run legend.“ and „Das
Ding ist wir dürfen nicht mehr front runnen, compliance sitzt uns am
Arsch.“ (which I don’t
want translate here…).
As a
reminder, front running means trading ahead of your client: If you
know that you will execute a huge order on behalf of your client
soon, you know that this higher demand will increase prices. It would
then obviously be interesting for you to buy before and sell, at a
higher price, once you have executed your client’s transaction.
But
traders did not only practice front running. They also shared
information about (upcoming) FX transactions and trading strategies
to drive certain benchmark exchange rates up or down. They namely
tweaked the 4 p.m. World Markets/Reuters Closing Spot Rates, most
widely used in U.S. and global foreign exchange markets, and the 1:15
p.m. ECB fix. The Reuters fix is based on actual trades and
calculates the median of bids and offers extracted from a certain
electronic trading system during a one-minute window. Given this
small sample, you can easily understand that traders were motivated
to alter the benchmark.
The
chat conversations that the regulators provide are indeed striking
and show that traders placed their personal interest beyond those of
their employers and clients.
What
do regulators say?
“The
FCA does not tolerate conduct which imperils market integrity or the
wider UK financial system. Today’s record fines mark the gravity of
the failings we found and firms need to take responsibility for
putting it right. They must make sure their traders do not game the
system to boost profits or leave the ethics of their conduct to
compliance to worry about. Senior management commitments to change
need to become a reality in every area of their business. But this is
not just about enforcement action. It is about a combination of
actions aimed at driving up market standards across the industry. All
firms need to work with us to deliver real and lasting change to the
culture of the trading floor. This is essential to restoring the
public’s trust in financial services and London maintaining its
position as a strong and competitive financial centre.”
Martin
Wheatley, FCA, November 12, 2014
“This
is not about having armies of compliance staff ticking boxes. It is
about firms understanding, and managing, the risks their conduct
might pose to markets. Where problems are identified we expect firms
to deal with those quickly, decisively and effectively and to make
sure they apply the lessons across their business. If they fail to do
so they will continue to face significant regulatory and reputational
costs.”
Tracey
Mc Dermott, FCA, November 12, 2014
“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.”
Aitan
Goelman, CFTC, November 12, 2014
What
do banks say?
“The RBS Board fully accepts the
criticisms within today’s announcements and condemns the actions of
those employees responsible for this misconduct. Today is a stark
reminder of the importance of culture and integrity in banking and we
will rightly be judged on the strength of our response.”
Philip
Hampton, Royal Bank of Scotland, November 12, 2014
”Since
becoming Chief Executive, I have worked to ensure that everyone
within the bank understands the importance of regaining the trust of
our customers. In order to achieve that trust we must set ourselves
the highest standards of integrity and professionalism, both
individually and collectively - this episode has clearly shown us to
have fallen well short of that. Now, it’s up to us to show that we
can learn the lessons of these mistakes and can be worthy of earning
trust in the future.”
Ross
Mc Ewan, Royal Bank of Scotland, November 12, 2014
“If
felt pain for our stuff and customers again [referring to FOREX fines
against RBS].”
Ross
Mc Ewan, Royal Bank of Scotland, November 12, 2014
“Citi
acted quickly upon becoming aware of issues in our foreign exchange
business and we have already made changes to our systems, controls
and monitoring processes to better guard against improper behavior.
While today’s settlements resolve significant investigations into
Citi’s foreign exchange business, as we have previously disclosed,
several additional regulatory agencies and enforcement bodies are
conducting investigations and making inquiries into this business. We
continue to fully cooperate with these investigations and inquiries.”
Citibank
Press Release, November 12, 2014
"Today's
resolutions are an important step in our transformation process and
towards closing this industry-wide matter for UBS. We continue to
cooperate with related ongoing investigations."
Sergio
P. Ermotti, UBS, November 12, 2014
Last,
but not least: What do (or rather did) FX traders say?
Bank
R Trader: 4:00:35 pm: ”well done gents”
Bank
W Trader 1: 4:01:56 pm: “hooray nice team work”
Bank
U Trader: 4:02:22 pm: “nice one mate”
What’s
next?
More
control of chat rooms, more compliance, more whistle blowing, a
change of culture, and automation of FX trading are to come. As said
a UBS FX trader, back in 2012: „It’s a
new world out there“.
Resources:
The
CFTC orders can be found here.
FINMA’s
investigation documents can be found here.
FCA’s
final notices on the fines are available for download here.
