Today (12 November 2014) the UK Financial Conduct Authority, the US Commodity Futures Trading Commission and the Swiss Regulator FINMA cumulatively fined Citibank, HSBC Bank plc, JP Morgan Chase Bank NA, The Royal Bank of Scotland plc, and UBS AG a total of
approximately £2 billion. The Financial Conduct Authority imposed the following fines which totals £1,114,918,000 ($1.7 billion):
1. Citibank NA £225,576,000
2. HSBC Bank plc £216,360,000
3. JP Morgan Chase Bank NA £222,166,000
4. The Royal Bank of Scotland plc £217,000,00
5. UBS AG £233,000,814.
You can find the Financial Conduct Authorities press release
You may find the actual notices of the fines
There are a number of technical words used in the press release. This is necessary because this is a very technical area of finance. Indeed, it appears that this is the only time that there have been public discussions surrounding this specific mechanism.
It should be noted that Barclays Bank plc continues to be investigated "which will cover its G10 spot FX trading business and also wider FX business areas." It should further be noted that Lloyds Bank plc and its wider group has been found not to have participated
in the foreign-exchange manipulation and will therefore not be subject to a fine.
All currencies throughout the world are regularly traded by traders and investment banks. A US dollar (for instance) will be worth more or less compared to a British pound tomorrow. Therefore if undertaken correctly the banks, traders and bank customers may
make a considerable amount of money by buying and selling different currencies into the other currencies on a regular basis. So, for example, when trade sanctions were imposed on Russia recently the rouble against the US dollar collapsed. That means that one
dollar will now buy significantly more roubles than it would have been able to by one year ago. When the investment banks undertake foreign-exchange trades they are trading in the millions at a time and consequently the profits and losses attached to such
trades may be significant.
G10 spot FX trading market
The G10 is the 10 largest economies in the world. There is therefore a market for the currencies of those 10 currencies. This is known as the G10 spot FX trading market. Within this a trader can buy and sell the currencies for members of the G10. According
to the Financial Conduct Authority the G10 is a "systemically important financial market".
You will see throughout the FCA fine and documentation references to the "spot price" or the "spot market". A spot price is simply the current variable price at which something is being traded, in this case currencies. Consequently, if I have an agreement with
a bank to buy US dollars for a fixed price I may have an agreement with the bank that in exchange for me paying the fixed price the bank pays me the spot price. In this way both banks, traders and bank customers are able to make additional profits. Manipulating
the spot price and manipulating the fix price will therefore create a loss or profit that they should not have.
Within the markets once a day the banks will all combine their average spot prices for currencies and provide a fixed rate for those currencies, which is the benchmark. It is this process and procedure that was partly manipulated, and is also of incredible
importance to banks, traders and bank customers who have entered into financial agreements with other banks regarding the purchase and sale prices of currencies. So, for instance, I could have an agreement (amongst many others) wherein I pay the spot price
(see above) for US dollars (being purchased with the UK pound) and the bank will in exchange pay me the fixed price as set at 4.00pm under the fixing. The two would be netted off and usually one party pays something to the other. It is very important to understand
the central banks fixes to understand the foreign exchange manipulation perpetrated by the banks. The fixed rate is the benchmark for FX trading. Fixes as a benchmark are used for a significant number of other markets. The Financial Conduct Authority sets
out the FX and emerging markets, FX sales, derivatives and structured products referencing FX rates and precious metals. You will note that Barclays was recently fined for manipulating the fixed rate for gold.
The Financial Conduct Authority references the stop loss mechanisms. A customer or trader may set up a mechanism under which if the financial product they are investing in (and this goes much further than foreign exchange) are sold if the market reaches a specific
price. This is used in order to limit the losses that may be incurred. So, for example, if I own $1 million and I trade in dollars and euros I may request that my trader sells all of my dollars in the event that the Euro reaches a certain point in order that
I either limit my losses or maintain a specified profit. The FCA has particularly noted that some of the banks involved in the FX trading had utilised customers stop loss orders in order to manipulate when customers were going to sell significant amounts of
currency, which would have an impact upon the spot price of the currencies, which would ultimately then have an impact upon the fix that was set at 4.00pm that day.
As noted there are a number of technical uses by the Financial Conduct Authority in the fines. If you would like to understand further any of the specific statements by the Financial Conduct Authority please do call a member of our banking litigation team who
would be happy to discuss it with you.
What has the Financial Conduct Authority found?
In principle the US, European and UK regulators found that banks were utilising confidential information from their customers to manipulate the currency exchanges or manipulate profits by forcing the sale of customers’ currencies (under their stop-loss orders)
They have only considered at the present the F10 spot FX market. In the manipulation the banks:
"acted [in their] own interests without proper regard for the interests of their clients, other market participants or the wider UK financial system. Traders at different banks formed tightknit groups in which information was shared of their client’s activity,
including using codenames to identify clients without naming them. Traders shared the information obtained through these groups to help them work out their trading strategies [of foreign exchange currencies]. They then attempted to manipulate fix rates and
trigger client "stop loss" orders (which are designed to limit the losses a client could face if it was exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure
that the rate at which the bank had agreed to sell a particular currency to its client was higher than the average rate it had bought back currency for in the market. If successful, the bank would profit."
The FCA has confirmed that this occurred between 1 January 2008 and 15 October 2013 and that the banks had an effective control which allowed the traders to put their bank interests ahead of those of the clients, other market participants and the wider financial
systems. It also states that the banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.
The fines from the Financial Conduct Authority will be paid over to HM Treasury. HM Treasury has not made public comment on what it will do with this money. Many SMEs are still awaiting the settlement of the IRHP claims and we would suggest that thought be
given to utilising this money to try and stabilise the damage being done to customers who were forced to take alternative hedges under the terms of the FCA review into IRHP sales and who have been badly treated by the banks generally.
What Does This Mean?
First to be noted is that the whole system continued to be unmonitored and subject to manipulation by traders up to 15 October 2013. The regulators had fined banks for LIBOR manipulation and these banks simply continued with their manipulation of the FX market.
Principally any person that traded in G10 currencies, which includes US dollars, Great British pound, euro etc, may have a claim against the banks identified by the FCA. Such claims may also be coupled with LIBOR claims.
Of particular note, however, is that we saw with the interest rate hedging product review that the banks initially only put relatively small amounts of money aside to cover the review. In regards to LIBOR manipulation the banks have also put aside relatively
small amounts of money to cover LIBOR rigging claims. In regards to foreign exchange manipulation some of the banks have already started putting aside hundreds of millions of pounds. That therefore confirms to legal professionals and financial commentators
that the banks are expecting significant amounts of successful claims and litigation as a consequence of these findings.
As noted above, Barclays’ investigation is ongoing and is looking at more than just the G10 FX market, suggesting that their fine will be another record fine. Lloyds has indicated that there were no fines expected from the regulators as a consequence of their
actions, which suggests quite strongly that they did not participate in these groups or if they did it was on a very minor scale.
Berg has been reviewing and considering the litigation aspects of the FX fines for some time now. We have been aware for some time that these issues were going to be investigated and that these fines were going to be significant and that the banks’ behaviour
impacted a very wide area of the foreign exchange currency markets. We are therefore prepared and would welcome any customer of Citibank NA, HSBC Bank plc, JP Morgan Chase Bank NA, The Royal Bank of Scotland plc and UBS AG and which contracted with the bank
in regards to foreign exchange products involving the G10 market to contact us so that we may discuss your options with you.
Berg has been asked whether the Final Notices (the determinations by the FCA) are evidence of an admission by the banks of illegal behaviour. They do not “prove” criminal behaviour. Indeed, when interviewed on Radio 4 today Martin Wheatley, the CEO of the
FCA, was very clear in confirming that he cannot make comment on whether this is or amounts to criminal behaviour. That must necessarily be investigated by the police, likely through the National Crime Agency, who will then prosecute individuals where appropriate.
In regards to civil claims, the Final Notices can provide sufficient evidence that activities occurred, which could then be bolstered by appropriate evidence being disclosed during civil proceedings. It is essential that you speak to an experienced banking
litigation solicitor before “interpreting” what the Final Notices and related statements say and how they should apply.
For more information about any of the above or for practical advice on this or any other aspect of banking and financial disputes, please contact the
Berg Banking Litigation Team on 0161 833 9211 or email us at
email@example.com. We can help you with various banking product disputes –
click here fore more information.
(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.)