Forex Probe Results in Fines, but Investigation Not Over Yet

The American Commodity Futures Trading Commission (CFTC), British Financial Conduct Authority (FCA), and Swiss Financial Market Supervisory Authority (FINMA) announced fines of $3.4 billion against five global banks on Wednesday, November 12th, 2014. The five banks were UBS ($799 million), Citigroup ($668 million), JP Morgan Chase ($662 million), the Royal Bank of Scotland ($634 million), and HSBC ($618 million). Of the total fine, $1.77 billion came from the FCA, $1.475 billion came from the CFTC, and $138 million came from FINMA. All of the banks had set aside funds as reserves in preparation for the fines.

Despite these initial fines, the investigation is not yet complete. Rather, regulators have made clear that they are continuing their probes into other major global banks and have stated that individuals will be investigated as well. Banks have geared up their reserves in preparation for the potential of future fines: for example, and despite signals that it would not be fined, Deutsche Bank has set aside €3 billion in reserves. Further, banks are undertaking other actions: the Bank of England announced that it had fired its chief foreign exchange dealer for allegedly not exposing the fact that traders had been sharing information. The Bank of England’s actions supplement the suspension or firing of more than 30 traders in other banks.

The probe is a result of a conspiracy by the targeted banks to manipulate foreign currency rates. Traders would communicate via chat rooms to pool their information and their assets. By pooling their assets, the traders were able to execute large-amount trades during the short windows provided by the WM Reuters (30 seconds before and after 4:00 p.m. in London) and European Central Bank Fixes (30 seconds before and after 1:15 p.m. in London) for averaging and setting currency rates. For example, one episode involved an order by a Citigroup client to buy €200 million. The Citigroup trader was able to pool the orders from the other banks and, with a total order of €542 million, was able to command better prices for the euros by inundating the market.

The key is that the large-scale orders themselves were not illegal; rather, the focus is on the conspiratorial activity of the large banks. Going forward, global banks can expect greater regulation, particularly with regards to the subject chat rooms. Further, individuals and banks can expect additional probes and pressure from regulatory agencies as the investigation into the $5 trillion-a-day foreign currency exchange market continues.


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