Regulators in the United States and the U.K. have extracted over $4 billion in fines from 6 banks, marking the beginning of the regulatory and legal fallout from a long-running, global investigation into manipulation of the foreign exchange market. Over $5 trillion in foreign exchange is traded every day and the market is dominated by a handful of large banks.
JPMorgan, Citigroup, Royal Bank of Scotland, UBS, and HSBC settled today with the U.K.'s Financial Conduct Authority and the U.S. Commodities Futures Trading Commission, while Barclays, which was expected to join the deal, was not part of it.
The U.S. national bank regulator, the Office of the Comptroller of the Currency leveled additional fines of $950 million against Bank of America, Citi, and JPMorgan Chase
"The setting of a benchmark rate is not simply another opportunity for banks to earn a profit," the CFTC's enforcement chief Aitan Goelman said in a statement, "The market only works if people have confidence that the process of setting these benchmarks is fair, not corrupted by manipulation by some of the biggest banks in the world."
The global investigation into foreign exchange manipulation has lead to the firing or suspension of dozens of bank employees suspected of participating in the scheme.
The settlements describe London-based traders working together in chatrooms, often sharing their clients' confidential information, to coordinate setting the rates used as benchmarks for currency trades for the benefit of their own trading positions. Some of the names of groups of foreign exchange traders working together indentified by the FCA were "the players", "the 3 musketeers", "1 team, 1 dream", "a co-operative" and "the A-team."
The FCA settled with the banks over not controlling their currency employees and not stopping their "unacceptable" behavior in the foreign exchange market, while the CFTC's settlement is more strongly phrased, accusing the banks involved with "attempted manipulation of" foreign exchange benchmarks "to benefit the positions of certain traders." The five banks neither admitted nor denied the findings of the CFTC, but agreed to the fines and to institute stronger controls and monitoring of their foreign exchange traders.
Citi paid $358 million to the U.K. Financial Conduct Authority, $310 million to the CFTC, and $350 million to the OCC; JPMorgan paid $352 million to the FCA, $310 million to the CFTC, and $350 million to the OCC; HSBC paid $343 million to the FCA and $275 million to the CFTC, RBS paid $344 million to the FCA and $290 million to the CFTC, while UBS paid $371 million to the FCA, $290 million to the CFTC, as well as an additional $139 million to the Swiss financial regualtor Finma. The OCC fined Bank of America $250 million. JPMorgan and Citi's fines both topped $1 billion, marking yet another greater than $1 billion settlement for the US megabanks.
Benchmarks are rates that set values between two currencies on the foreign exchange market for the pricing of currencies-based financial instruments and trades. One commonly cited set of rates, the World Markets/Reuters Closing Spot Rates, is set at 4 pm London time each day, and was the subject of much of the manipulation laid out in the FCA and CFTC's settlements. The 4 pm fix is based on trading that happens in the 30 seconds before and after 4 pm and so was subject to manipulation by traders working together to make certain trades in that window.
The schemes did not always work, the CFTC cited one instance where a JPMorgan trader and another bank trader tried to manipulate the 4 pm fix for euros and U.S. dollars but ended up "hosed" and tried to figure out which other traders "might have executed trades that went against them and caused the rate to fix at an unfavorable level."
The transcripts of chat conversations depict a striking level of cooperation and camaraderie between traders at different banks, even expecting members of the group to put their interests above that of the banks they worked at.
One JPMorgan trader, when discussing with other traders whether to admit a new member of the group said "I trust you implicitly and your judgement," but worried that the new trader "will..tell rest of [his] desk stuff." Another trader responded, "is he gonna protect us? Like we protect each other against our own branches."
JPMorgan banned the multi-bank chat for its traders in December, 2013 after conducting an internal investigation. Citi banned the chatrooms in early 2013. A JPMorgan spokesperson described the behavior described as "unacceptable" and said the bank had "spent a lot of time reinforcing the high standards of conduct expected of our people."
A Citi spokesperson said that the bank had already made changes to "better guard against improper behavior." The spokesperson also noted that "several additional regulatory agencies and enforcement bodies are conducting investigations and making inquiries" into Citi's foreign exchange business and that the bank is fully cooperating with the investigations.
All five banks cooperated with the CFTC's investigation and paid reduced settlements to the FCA for settling early in the investigation.
The bad behavior ran from 2008 to 2013, the FCA said, while the CFTC covered 2009 to 2012.
Barclays dropped out of the settlement and said in a statement it "considered" settling on "closely similar terms" with the two regulators, but instead decided to "seek a more general coordinated settlement."
Not included was Deutsche Bank, the largest player in the $4 trillion-per-day foreign exchange market. The five largest dealer banks — Deutsche Bank, UBS, Citi, Barclays, and JP Morgan — controlled 53% of the daily trading volume in currencies in 2013, according to a report by Greenwich Associates.
Deutsche Bank spent $1.1 billion in the third quarter on litigation, the bank said when it reported its results in October. The total costs for banks across all the investigations into foreign exchange manipulation could top $40 billion, a team of Citigroup analysts wrote in a note last month. The Financial Times reported early Wednesday that the FCA had cleared Deutsche Bank, although they still face investigations from other regulators.
The deal will likely ramp up criticism of large banks as the conduct occurred after the financial crisis, whereas recent billion-plus settlements were typically over the banks' pre-financial crisis activity in the mortgage securities market.
The banks that are big players in the foreign exchange market have been amassing billions recently to pay for anticipated settlements, and not just with the regulators that signed on today, the Commodities Futures Trading Commission and the Financial Conduct Authority.
The Justice Department is also conducting a criminal investigation. The Federal Reserve and New York's financial regulator, the Department of Financial Services, declined to sign on to today's deal, the New York Times reported.
Bank of America and Citigroup both tacked on new costs recently to their third quarter earnings to reflect the potential possible cost of the foreign exchange investigation.
Bank of America added a $400 million litigation expense, and said in a statement that it had been "engaged in separate advanced discussions with certain U.S. banking regulatory agencies to resolve matters related to its foreign exchange business."
Citigroup sliced $600 million from its profits citing "very recent communications with certain regulatory agencies related to previously disclosed-matters" and disclosed that Swiss, American, and U.K. regulators were investigating its foreign exchange business.
JPMorgan disclosed that the criminal division of the Justice Department was looking into its foreign exchange businesses and that it was in conversations with regulators about resolving their investigations. The bank's legal expense in the third quarter was $1 billion, which its chief financial officer Marianne Lake said was "in large part" related to foreign exchange. It also upped its top-end estimate for legal losses beyond what it had already reserved by another $1.3 billion.