Taking Stock Of How Much Banks Have Paid For Settling Forex Manipulation Charges

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Last week, six of the largest banking groups in the world announced details of another round of settlement with regulators over their alleged manipulation of foreign exchange rates. ((Global banks admit guilt in forex probe, fined nearly $6 billion, Reuters, May 20 2015)) The settlement, which was led by the U.S. Department of Justice (DoJ), will see the banks cough up $6 billion in fresh fines for their forex misgivings. The deal was reached six months after the banks closed joint settlement talks with U.S., British and Swiss regulators for a total payout of $3.4 billion (see Five Banks Settle Forex Manipulation Charges For $3.4 Billion).

Since last November, seven global banks – Barclays (NYSE:BCS), UBS (NYSE:UBS), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), RBS (NYSE:RBS), HSBC (NYSE:HSBC) and Bank of America (NYSE:BAC) – have signed forex settlement deals in excess of $10 billion. All the banks have already set aside sufficient cash to cover the costs of their latest deal, so their Q2 results are not expected to be negatively impacted. This is not the end of the matter for all banks, though, as Bank of America and HSBC are yet to settle with the DoJ.

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The global forex market sees more than $5.3 trillion changing hands each day, and (as in the case of LIBOR) it is the biggest banks that help establish benchmark exchange rates – something that represents a potential conflict of interest given that these banks have a strong presence in the forex trading business. So when it was revealed that the world’s biggest banking institutions had manipulated various inter-bank rates in the wake of the LIBOR scandal, global financial regulators began investigating the banks’ foreign exchange businesses too.

The first round of settlement talks featured five banks – UBS, JPMorgan, RBS, Citigroup and HSBC – and concluded last November after a series of investigations by the U.S. Commodity Futures Trading Commission (CFTC), the British Financial Conduct Authority (FCA) and the Swiss FINMA found several flaws in the way these banks run their foreign exchange units. These banks paid £1.1 billion ($1.77 billion) to the FCA. [1] The CFTC fined them $1.48 billion to settle a string of forex-related charges leveled against them. [2] And, UBS paid CHF 134 million ($140 million) to Swiss regulator FINMA while also accepting several operating restrictions. [3] At the same time as this $3.4 billion joint deal, the U.S. Office of the Comptroller of the Currency (OCC) fined JPMorgan, Citigroup and Bank of America $950 million for “unsafe or unsound practices related to their foreign exchange (FX) trading businesses”. [4]

Investigations by several U.S. regulators continued over the months – especially by the DoJ and the Federal Reserve. The talks dragged on because of the tough stand adopted by the DoJ, which pressed for guilty pleas from the banks. The settlement last week finally brought these talks to an end for most of the banks. Four of the banks pleaded guilty to the charges and accepted fines in excess of $2.5 billion from the DoJ. [5] The other regulators involved were the Federal Reserve and the New York Department of Financial Services (DFS), with the former announcing fines of $1.8 billion. [6] The DFS fined Barclays a sum of $485 million. [7]

The following table captures the fines handed out to each of the banks by the individual financial regulators. The ** represents pending settlements.

(in $ mil) DoJ FCA CFTC Fed OCC DFS FINMA Total
Barclays 650 441 400 342 485 2,318
Citigroup 925 358 310 342 350 2,285
JPMorgan 550 352 310 342 350 1,904
RBS 395 344 290 274 1,303
UBS 371 290 342 140 1,143
HSBC ** 343 275 618
Bank of America ** 205 250 455
Total 2,520 2,209 1,875 1,847 950 485 140 10,026

Notably, Barclays and Citigroup figure at the top of the list with $2.3 billion in fines each. UBS, which was fined the heaviest in the first round of talks, got away without a fine from the DoJ due to its role in bringing the forex manipulation issue to regulators’ attention. [8] However, the DoJ tore up its 2012 Non-Prosecution Agreement (NPA) with UBS over the bank’s LIBOR misgivings – forcing the bank to plead guilty in the older matter and to pay a separate $203 million fine.

With this, all banks in the list besides HSBC and Bank of America have resolved essentially all the investigations into their foreign exchange operations by regulators. The remaining two banks will likely enter into separate agreements over coming months – taking the total cost for all banks to more than $11 billion.

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Notes:
  1. FSA fines five banks £1.1 billion for FX failings and announces industry-wide remediation programme, FCA Press Releases, Nov 12 2014 []
  2. CFTC Orders Five Banks to Pay over $1.4 Billion in Penalties for Attempted Manipulation of Foreign Exchange Benchmark Rates, CFTC Press Releases, Nov 12 2014 []
  3. FINMA sanctions foreign exchange manipulation at UBS, FINMA Press Releases, Nov 12 2014 []
  4. OCC Fines Three Banks $950 Million for FX Trading Improprieties, OCC Press Releases, Nov 12 2014 []
  5. Five Major Banks Agree to Parent-Level Guilty Pleas, U.S. DoJ Press Releases, May 20 2015 []
  6. Federal Reserve announces fines totaling more than $1.8 billion against six major banking organizations for their unsafe and unsound practices in the foreign exchange (FX) markets, Fed Press Release, May 20 2015 []
  7. NYDFS Announces Barclays To Pay $2.4 Billion, Terminate Employees For Conspiring To Manipulate Spot FX Trading Market, NYDFS Press Release, May 20 2015 []
  8. UBS participates in resolutions of industry-wide FX matter, UBS Press Releases, May 20 2015 []