The Commodity Futures Trading Commission and the UK Financial Conduct Authority brought enforcement actions against five financial institutions for attempted manipulation of foreign exchange benchmark rates. The alleged wrongful conduct occurred from 2008 to 2013, according to the FCA, although the CFTC's allegations principally centered around conduct from 2009 to 2012.
The five firms were Citibank, NA, HSBC Bank plc, JPMorgan Chase Bank, NA, Royal Bank of Scotland plc, and UBS AG. Collectively, the banks paid over US $3.1 billion to resolve these complaints—US $1.4 billion to the CFTC, and GBP 1.1 billion (approximately US $1.7 billion) to the FCA.
Separately, the Office of the Comptroller of the Currency also levied aggregate fines of US $950 million against Bank of America, NA, Citibank and JPMorgan Chase for foreign exchange trading improprieties from 2008 to 2013, while the Swiss Financial Market Supervisory Authority required UBS to disgorge Swiss Francs 134 million (approximately US $139 million) for its misconduct.
According to the CFTC, the accused firms—through certain of their traders—endeavored to benefit their own trading positions and trading positions at other firms by attempting to manipulate and aid and abet other firms’ attempts to manipulate certain FX benchmark rates.
The firms’ traders coordinated their attempts to manipulate the FX benchmark rates using private electronic chat rooms, charged the CFTC and FCA. According to the CFTC, in these chat rooms, FX traders at times:
disclosed confidential customer order information and trading positions, altered trading positions to accommodate the interests of the collective group, and agreed on trading strategies as part of an effort by the group to attempt to manipulate certain FX benchmark rates, in some cases downward and in some cases upward.
Both the CFTC and the FCA provided numerous excerpts of problematic conversations in each complaint and ancillary documents.
According to the CFTC and FCA, some of the alleged FX benchmark rates manipulation occurred while the accused firms were aware that regulators were investigating attempts by banks to manipulate the London Interbank Offered Rate and other interest rate benchmarks. The regulators also said that the financial institutions had at least some contemporaneous knowledge of the FX misconduct (other than at the trader level)—in one circumstance through whistleblower reports—but did not adequately follow up at the relevant time on the leads.
The CFTC and the FCA, in their complaints, argued that each of the banks lacked adequate policies, procedures and training regarding trading around FX benchmark rates, and inadequate policies and oversight of FX traders’ use of chat rooms and other electronic messages. However, both regulators acknowledged that each of the banks has taken remedial measures to address misconduct by their FX traders and to improve their internal controls.
Both the CFTC and the FCA acknowledged that UBS was the first bank to report the relevant misconduct to it.
Each of the banks consented to the CFTC settlement without admitting or denying any findings or conclusions in the Commission’s complaint.
In its charges, the OCC alleged that each of the relevant banks engaged in unsafe or unsound banking practices in connection with their oversight of and governance of FX trading. This prevented the banks from identifying their traders’ misconduct for several years, claimed the banking regulator.
In addition to requiring disgorgement from UBS, the Swiss regulator also limited the variable compensation for UBS' foreign exchange and precious metals employees globally for two years, and required the bank to automate at least 95% of its global foreign exchange trading, among other measures. The regulator also announced that it has initiated enforcement actions against 11 of the bank's current and former employees including "persons up to the highest level of the Investment Bank's foreign exchange business."
Compliance Weeds: Registered firms should maintain robust systems to regularly monitor electronic and other communications to help detect potential regulatory and legal issues, as well as inappropriate communications. Patterns of potential misconduct should be most proactively followed up, but all problematic incidents should be documented and reviewed. Regular training should be provided to employees not only regarding ethical culture, and regulatory do’s and dont's, but also communication etiquette (it still amazes me what some folks say on recorded telephone lines or in electronic communications). Firms should also explore ways to integrate in a single location information dispersed throughout a firm regarding allegedly problematic conduct and clients so it potentially is easier to identify and timely act upon red flags.