Regulators in the United States and the United Kingdom each announced billion-dollar settlements with five major banks to resolve allegations of manipulation in the foreign exchange markets.
The UK’s Financial Conduct Authority (FCA) announced that it has imposed fines totalling £1.1 billion (US$1.7 billion) against five banks for “failing to control business practices” in their spot foreign exchange (FX) trading operations. The fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks.
At the same time, the U.S. Commodity Futures Trading Commission (CFTC) also settled charges against the same five firms, imposing US$1.4 billion in penalties, for “attempted manipulation of, and for aiding and abetting other banks’ attempts to manipulate, global foreign exchange (FX) benchmark rates to benefit the positions of certain traders.”
In both cases, the five banks involved are Citibank, HSBC Bank plc, JPMorgan Chase, The Royal Bank of Scotland plc (RBS) and UBS AG (UBS). Additionally, the Swiss regulator, FINMA, ordered UBS to disgorge US$138 million.
The FCA says that between January 2008 and October 2013, ineffective controls at the banks allowed spot FX traders to “put their banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.”
It reports that traders shared information about clients’ activities, which was supposed to be confidential, and attempted to manipulate spot currency rates; and, that they colluded with traders at other firms, in a way that could disadvantage those clients and the market. “At the heart of today’s action is our finding that the failings at these banks undermine confidence in the UK financial system and put its integrity at risk,” the FCA said.
The regulator also noted that it is continuing an investigation into activities at Barclays Bank plc, but it has not yet brought any allegations against the firm.
The FCA says that in addition to taking enforcement action, it is launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. “We will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed,” it says.
“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,” said Martin Wheatley, chief executive of the FCA.
“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,” he added.
The CFTC notes that the banks involved cooperated with the investigations, and that UBS was the first bank to report misconduct to the CFTC.
Update
A third financial regulator has sanctioned a handful of banks today in connection with their foreign exchange (FX) trading practices.
Following the billion-dollar enforcement announcements from both FCA and the CFTC against the five global banks, the U.S. Office of the Comptroller of the Currency (OCC) also levied US$950 million in fines against three banks, Bank of America, Citibank, and JPMorgan Chase (JPMorgan and Citi were both targeted in the other regulators’ actions).
The OCC said that its examinations found that the banks failed to identify, or prevent, employee misconduct related to FX sales and trading. It reports that between 2008 and 2013, some of the banks’ traders held discussions in online chat rooms about coordinating FX trading strategies to manipulate exchange rates; that traders disclosed confidential information, including customer orders and rate spreads; and, that traders discussed activity to trigger trading action that would be potentially detrimental to customers and beneficial to the trader, discussed pending orders, and agreed not to trade in particular currencies.
It also says that the banks had deficiencies in their internal controls and engaged in unsound practices in relation to the oversight and governance of their FX trading activities.
The US$950 million total includes US$250 million assessed against Bank of America, US$350 million against Citibank, and US$350 million against JPMorgan Chase Bank. In addition to assessing civil money penalties, the OCC issued cease and desist orders requiring the banks to correct deficiencies and enhance oversight of their FX trading activity.
“The enforcement actions we are issuing today make clear that the OCC will take forceful action, not only when the institutions we supervise engage in wrongdoing, but when management fails to exercise the oversight necessary to ensure that employees follow laws and regulations intended to protect customers and maintain the integrity of markets,” said Comptroller of the Currency, Thomas Curry.
“These enforcement actions were taken because several large banks permitted an environment to develop in which unscrupulous traders discussed manipulating foreign exchange markets. Our action today, and those of our fellow regulatory agencies here in the United States, in the United Kingdom and in Europe, sends a very strong signal that such misconduct will not be tolerated,” Curry added.