Five Banks Settle Forex Manipulation Charges For $3.4 Billion

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The joint settlement talks between U.S., British and Swiss regulators and five major banking groups over the manipulation of foreign exchange rates came to a close earlier this week, with the banks agreeing to cough up $3.4 billion in fines to put this issue behind them. [1] The banks – UBS (NYSE:UBS), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), RBS (NYSE:RBS) and HSBC (NYSE:HSBC) – will pay £1.1 billion ($1.77 billion) to the U.K.’s Financial Conduct Authority (FCA) and $1.48 billion to the U.S. Commodity Futures Trading Commission (CFTC) to settle a string of forex-related charges leveled against them. [2] Additionally, UBS will pay CHF 134 million ($140 million) to Swiss regulator FINMA and will face restrictions on its compensation payouts over the next two years. [3]

Each of these banks have already set aside sufficient cash to cover this settlement, with all of them taking a multi-million dollar legal charge as a part of their Q3 2014 results. Their Q4 figures are therefore not expected to be affected by this announcement. Notably, Barclays (NYSE:BCS) was also a part of the group of banks in the settlement talks, but it is expected to settle at a later date as the FCA is still investigating the British banking giant. [1]

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The global forex market sees nearly $5 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.

A series of investigations by the U.S. CFTC, British FCA and Swiss FINMA found several blatant flaws in the way these banks run their foreign exchange units. These included:

  • Attempts by the banks to manipulate the World Markets/Reuters Closing Spot Rates (WM/R Rates) – the most widely referenced FX benchmark rates – either independently or in collusion with other banks
  • Disclosure of confidential customer order information and trading positions
  • Altering trading positions to gain collectively at the expense of clients as well as the market
  • Having insufficient internal controls to separate proprietary trades from client trades, or to restrict interactions between employees participating in the rate fixing process from forex traders

The following table captures the fines handed out to each of the banks by the individual financial regulators:

(in $ mil) FCA CFTC FINMA Total
UBS 371 290 140 801
Citigroup 358 310 668
JPMorgan 352 310 662
RBS 344 290 634
HSBC 343 275 618
Total 1,768 1,475 140 3,383

UBS faces the most significant fines, with the Swiss bank shelling out a little more than $800 million to settle its forex-related misgivings. The bank will also come under increased scrutiny from FINMA, and has to restrict bonuses to all its employees working globally in foreign exchange and commodities trading operations to below 200% of their base pay for the next two years. While this will have a slightly positive impact on the bank’s investment banking margins over coming years, the bank could lose some of its best traders to rival banks that do not have to adhere to such payment restrictions.

Also, as a part of the settlement, all the banks have agreed to cease and desist from any further violations and are required to strengthen the internal control policies governing their forex units. It should be noted that all the banks have already put in place stronger control measures to curb such practices in the future.

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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 []