Allegations of manipulation in the Forex market have the potential to give rise to both regulatory fines and legal claims dwarfing those relating to LIBOR – and, in contrast with LIBOR, any difficulties in establishing a causal link between the manipulation and the losses incurred are likely to be more easily overcome. The foreign exchange market is the largest financial market in the world, with an estimated daily volume of up to $5.3tn.
Since mid-2013, regulators worldwide have been investigating allegations that the market has been subject to widespread, longstanding manipulation. Enquiries have focussed on the WM/Reuters closing rate, a daily rate determined by taking the median rate of trades carried out in a 60 second window either side of 4.00pm. Unlike LIBOR, therefore, which is based on submissions of estimated borrowing rates from a panel of submitting banks, the WM/Reuters rate is based on actual trades.
The allegations that have surfaced to date are broadly that traders were front-running client orders, engaging in trading practices designed to affect the rate and colluding with traders at other banks to increase the prospects of doing so successfully.
The techniques used varied, but included practices such as:
- "Front-running” by using information about client orders to trade in advance of the fix to protect or improve the trader’s own positions. While some clients may have suspected that their orders were being used in such a way, they would not have been aware that traders at different banks were colluding in order to push through trades in a concerted way
- “Banging the close” by concentrating trades around the 4.00pm fixing window with the purpose of moving the rate
- “Painting the screen” by engaging in false trades that were immediately unwound
The dominant players in the Forex market are Deutsche Bank, Citi, UBS and Barclays. Claims have been issued in the US against all four, as well as HSBC, JP Morgan and RBS. These claims allege that traders at the banks used online chatrooms (with names such as “The Bandits’ Club” and “The Cartel”) to coordinate their actions. The records of such communications are being scrutinised by regulators – including the Department of Justice in the US and the FCA in the UK – in their ongoing investigations. A number of the banks which are subject to regulatory scrutiny have already dismissed traders following their own internal investigations.
The European Commission has also begun competition law inquiries relating to the anti-competitive nature of any collusion.
What potential claims arise?
Potentially, any customer who engaged in Forex transactions (be it spot, forwards, options or otherwise) executed at the relevant WM/Reuters rate with one of the banks involved may have a claim if the rate they traded at was affected by market manipulation. In practice, given the relatively small degree by which the rate would have been affected on any individual trade, it is likely to be those customers who traded currencies in large volumes on a regular basis who will have claims that will be worthwhile pursuing. Month-end rebalancings by pension funds and asset managers, for instance, are the types of transaction that are likely, when aggregated over a period of time, to have the potential to reveal substantial losses.
The claims that might be pursued will depend on the facts in each individual case, but may include actions of the following nature:
- Breach of contract – Depending on the contractual arrangements in place, it may be possible to bring a claim based on breach of an express term, or an implied term to the effect that the bank would not use the client’s order to seek to manipulate the WM/Reuters fix whether in collusion with other banks or otherwise
- Conspiracy – If it can be shown that traders conspired with one another in a way that involved causing loss to their clients, damages in conspiracy may follow
- Misrepresentation – Written material produced by the bank or oral statements made by traders may support a claim for misrepresentation. Misrepresentation claims have been pursued in the LIBOR context, and a similar analysis could apply in relation to Forex
- Breach of competition law – Collusion between traders will give rise to questions of competition law and anti-competitive practices. Private follow-on actions may flow from regulatory findings by UK or EU competition authorities. Unlike the position in the US, it is not necessary to show that the setting of the WM/Reuters rate was a competitive process for the claim to succeed
- Unjust enrichment – Where monies were paid to a bank in the mistaken belief that a customer was trading at a true rate, sums paid may be recoverable by way of an unjust enrichment claim
Given both the generally straightforward nature of a Forex transaction and the direct nature of the alleged manipulation, establishing a causal link between misconduct on the part of a bank and loss suffered by its customer may well be more straightforward than in respect of LIBOR manipulation, although it will still require expert analysis.
If it can be shown that on a particular date a trade was executed at an artificial rate that was to the detriment of the customer, a prima facie case of loss would be established. We would expect claimants to identify and aggregate all such negatively affected trades in their claims (and we currently see no reason why claimants would need to take into account transactions – if any – where the rate may have inadvertently been moved in their favour).
Examining potential claims It is possible to conduct expert analysis of publicly available market data in order to identify those dates on which it appears that manipulation is likely to have taken place. One can then map actual trading history against that analysis in order to identify transactions that may have been affected by manipulation, and calculate potential losses.
If and when the ongoing regulatory investigations produce detailed findings, these may well contain valuable material supporting potential claims. While that material may be useful, potential claimants would be well advised to start considering now whether they have engaged in transactions that may be affected and – if so – the volumes and time periods involved. In particular, where a potential claim arises out of historical facts, it would be prudent to seek legal advice in respect of the applicable limitation period(s) and, if appropriate, the necessary steps required in order to protect its position by, for example, seeking a standstill arrangement to stop time running on its claims.