What has happened?

On 19 February 2019, HSBC reported that the European Commission is investigating “potential coordination in [FX] options trading”. The announcement signals an extension of the Commission’s long-running antitrust scrutiny into FX markets.

In its annual report, HSBC stated that – in October 2018 – it received an information request from the Commission. According to the annual report, the Commission’s investigation is “at an early stage”, but concerns suspected coordination in FX options trading. FX options are contracts to trade currencies at a set rate at a future point in time, allowing traders to speculate on and/or hedge against fluctuations in exchange rates.

However, precise details – regarding the suspected misconduct, the relevant time-frame and other banks involved – are yet to emerge, as the Commission has not yet made a public statement about the investigation.

Why does this matter?

Whilst it is unclear what prompted the information request, it is notable that the Commission now has two probes into misconduct in the FX markets.

It is a feature of antitrust investigations in the financial services sector that scrutiny of one area will often bring to light concerns in a related area. Typically, when faced with an investigation, a bank will conduct its own internal review of communications. This can uncover fresh concerns, prompting immunity or leniency applications that broaden the scope of the investigation or trigger a separate investigation. For example, the Commission’s investigation of Interest Rate Derivatives resulted in three separate cases – Euro, Swiss Franc and Yen – with a different immunity applicant in each case. This highlights the value to a defendant bank of a speedy and thorough internal investigation, even if it isn’t the first to report the conduct that prompted the initial investigation. The bank can at least seek immunity from fines in respect of the newly discovered conduct.

It makes sense that the Commission’s scrutiny of FX options trading is separate from its investigation into coordinated trading around FX benchmarks. That investigation was first reported in 2013, and is now at an advanced stage. The Commission started settlement discussions with the banks in 2017, and it is now pursuing full proceedings against Credit Suisse, which refused to settle. Another reason for a separate probe would be if the latest concerns are materially different. For example, the Commission’s primary FX probe might not concern FX options trading, or it might involve a different combination of banks, traders in different geographies, or a different time period.

More broadly, this latest investigation highlights the steady stream of European antitrust scrutiny in the financial services sector. There are presently at least three investigations into bond markets: two by the Commission (USD-denominated SSA bonds and EUR-denominated EGBs) and one by the UK CMA. Meanwhile, the UK Financial Conduct Authority has issued its first ever antitrust fine – for bid-rigging by three asset management firms in the context of an IPO and share placement.

What happens next?

According to HSBC, the Commission’s probe into FX options trading is “at an early stage”. The Commission will be in evidence-gathering mode, and based on responses to its information requests and any immunity or leniency applications received, it will assess the basis for an infringement decision. Should the Commission’s concerns be confirmed, its next step would be to issue antitrust charges. If so, that raises the prospect of subsequent private claims for damages.