The last two years have seen Libor manipulation or rate-fixing at the centre of a scandal that emerged in the US and crossed the Atlantic to the UK, prompting regulatory investigations and hefty penalties from the Financial Conduct Authority (FCA). Globally, the Libor scandal has to date cost banks and their insurers almost €6 billionn in regulatory fines, and allegations of Libor manipulation have found favour with some claimants in UK litigation. This year, the new scandal to emerge in the UK from across the Atlantic is that of the foreign exchange (Forex) manipulation. It is alleged that some major banks have been sharing information about orders from their clients in order to manipulate the daily benchmark price of global currencies on the Forex market.
What is Forex manipulation?
The Forex market is where global currencies are traded each day, and, estimated at €5 trillion a day, that market is by far the largest of them all, with UK financial institutions being involved in up to a third of all transactions. The FCA and the European Commission have recently commenced investigations into allegations of Forex manipulation, although details of the precise nature of the manipulation remain sketchy. It is thought however that one key aspect of the manipulation has been “banging the close”. In the London market, for example, there is what is known as the “London fix”: an agreed benchmark price of currencies (and a host of other financial products) taking the average prices during a single 60 seconds of trading each day. Those benchmark prices are then used as the reference rate for much larger currency transactions. “Banging the close” involves concentrating the trade of client orders in the moments before and during the 60 second window, thereby pushing rates up or down. It is alleged that some banks have been involved in sharing information about their client orders in order to work together to try to influence the benchmark price of a given currency, as desired, to increase the banks’ profit but to the detriment of their clients. There is no firm evidence at present of this activity by UK financial institutions, but the parallels with the previous Libor scandal gives cause for concern.
Who will claim?
The effects of movements in currencies in the Forex market trickles down to investors and holidaymakers alike, but it is those with significant stakes in the Forex market that will be exposed to large losses on small and subtle (manipulated) movements. Asset managers, pension funds and corporate clients of banks are likely to be obvious victims of Forex manipulation.
We are already seeing in the US a number of class actions brought by pension funds against some major banks in connection with alleged Forex manipulation. It remains to be seen whether there will be an appetite in the UK to pursue litigation against such banks. In the case of Libor rate-fixing, some UK claimants sought to amend their claims to introduce new allegations of Libor manipulation. In some cases the court allowed this (Graiseley Properties Ltd and Others v Barclays Bank), but not in others (Deutsche Bank and Others v Unitech). Forex trading is a common feature of negligent investment/portfolio management claims brought against banks by disappointed investors, but alleged manipulation goes much further than this. As to what might happen in UK civil litigation, much will depend on the findings of the FCA and European Commission investigations.
For the time-being, it is a case of financial institutions and their insurers keeping a close eye on the progress of the various regulators’ investigations. With the issue now very much in the public domain and attracting attention from the regulators, FI insurers can expect to start to receive notifications from insureds who will be conducting their own internal investigations, under both PI and D&O policies. Fraud exclusions may apply if evidence of manipulation is found, so insurers will doubtless reserve their rights pending full investigation of all relevant issues. However, given the potential scale of the problem in such a large and active market, Forex manipulation could prove to be the next headache for financial institutions and their insurers.