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British, American and Swiss regulators fined five of the world's biggest banks a combined $3.3 billion on Wednesday for conspiring to manipulate the foreign currency markets, the latest scandal to hit an industry facing increased scrutiny and mounting legal costs for its past sins.
The fines come as regulators are increasingly targeting a business culture in the financial industry that they say encourages improper conduct by its employees. The banks could still face criminal charges in the matter.
On Wednesday, the Financial Conduct Authority of Britain said it had reached a so-called global settlement worth a combined 1.1 billion pounds, or about $1.76 billion, with five companies: the Swiss bank UBS; the British lenders HSBC and the Royal Bank of Scotland; and the American banks JPMorgan Chase and Citigroup. The settlement is large by European standards, and a record for the British financial authority.
The British bank Barclays had been expected to join the settlement, but dropped out at the last minute. The Financial Conduct Authority said on Wednesday that it would continue its investigation of Barclays.
"After discussions with other regulators and authorities, we have concluded that it is in the interests of the company to seek a more general coordinated settlement," Barclays said in a statement on Wednesday. "We will continue to engage with these authorities," it continued, "with the objective of bringing this to resolution in due course."
Separately, the Commodity Futures Trading Commission in the United States on Wednesday imposed $1.4 billion in penalties against Citigroup, HSBC, JPMorgan, RBS and UBS.
And regulators in Switzerland penalised UBS about $138 million.
Between January 2008 and October 2013, the British financial authority said, the banks allowed traders in the foreign exchange markets to put the interests of their banks ahead of those of their clients, of other market participants and of the wider British financial system. That included sharing confidential client information and attempts to manipulate currency rates by colluding with traders at other companies, the Financial Conduct Authority said.
The British and American regulators released documents detailing conversations among traders in electronic chat rooms that were filled with jargon, incorrect spelling, bad language and typos. One document showed a conversation among three traders - at JPMorgan, Citibank and UBS - discussing whether to let a fourth into their group. "Will he tell rest of desk stuff or god forbin his nyk'" asked one trader, indicating concern about whether the new participant could be trusted.
The fines, while adding up to a large sum, are unlikely to seriously impinge on the banks' balance sheets. Many of the lenders had signaled in recent weeks that a settlement was coming, with several setting aside money for fines and other charges, or revising their third-quarter results to reflect the impact of a potential deal.
Misconduct uncovered in the run-up to the financial crisis and in the setting of global benchmark interest rates in recent years spurred efforts by regulators to root out improper behavior in other areas of the markets, including currencies.
The settlements were the result of months of negotiations with the banks after regulators in Britain, the United States and other countries initiated investigations into the foreign exchange markets last year.
The Financial Conduct Authority accused the lenders of failing to have proper controls in place to prevent misconduct in the trading of currencies of the so-called Group of 10 nations, while the Commodity Futures Trading Commission accused traders at the banks of trying to more broadly manipulate foreign exchange benchmark rates.
"Wednesday's record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right," Martin Wheatley, the chief executive of the financial authority, said in a news release. "They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business."
The Commodity Futures Trading Commission settlement is the first large enforcement action under its new chairman, Timothy G Massad, and its enforcement director, Aitan D Goelman.
The largest penalty was against UBS, which has been fined a combined $799.2 million by British, American and Swiss regulators.
By settling with the British and American authorities, the banks will have long-sought clarity about the impact of the inquiries. But the investigations will now enter a new phase, which could include criminal charges against individuals and financial institutions.
About 30 traders were suspended or fired after internal inquiries at the banks. Several of those traders could face criminal charges.
The United States Justice Department is conducting its own investigation into potential criminal misconduct at the banks and is aiming to file a case against at least one bank by the end of the year, according to people briefed on the inquiry.
The foreign exchange market is one of the largest and most liquid markets in the world, with a daily average turnover of $5.3 trillion, 40 per cent of which is processed in London. By comparison, the global bond market is about $272 billion and the global equity market about $216 billion.
Spot foreign exchange benchmarks, also called fixes, are used to establish the relative value of two currencies, and those fixes are used by companies to help manage exposures to trillion of dollars in foreign currencies. The fixes are among the issues at the heart of the charges against the banks.
Documents released by the authorities show that the traders formed groups at the banks with names like "the players," "the three musketeers", "one team, one dream", "a cooperative" and "the A-team." Using code names to identify clients, the groups shared private information about clients including pension funds, hedge funds and big asset management firms.
Sharing confidential client information about major market participants allowed the traders to manipulate the market to the benefit of their own trading strategies, including manipulating the fix rates and setting off events that would cause clients to lose money. If a trader could ensure that the rate at which a bank had agreed to sell a currency was higher than the rate at which it had bought the currency, it could profit.
In one exchange, taken from HSBC documents, a trader appeared into various different chat rooms to attempt to manipulate the World Markets/Reuters Closing Spot Rates.
"Early days but im a seller cable at fix," said one trader, indicating that he wanted to sell the pound. The term "cable" is routinely used by traders to refer to the exchange rate between the pound and the dollar.
Another trader said he was looking to do the same, and a third offered to do some "digging." The first trader came back to say "Hopefulyl a fe wmore get same way and we can team whack it."
The banks on Wednesday condemned the activity highlighted in the settlements and noted that changes had already been implemented.
A JPMorgan spokeswoman called the trader conduct described in the settlements as "unacceptable" and said the bank was continually improving systems and controls. A Citigroup spokesman said that the bank had acted quickly after becoming aware of the issues, and that it had already made changes to guard against improper behavior.
"Today's resolutions are an important step in our transformation process and towards closing this industrywide matter for UBS," said Sergio P. Ermotti, the Swiss bank's chief executive.
HSBC said it does "not tolerate improper conduct, and will take whatever action is appropriate."
Philip Hampton, the RBS chairman, said the bank's board condemned the improper actions: "Today is a stark reminder of the importance of culture and integrity in banking, and we will rightly be judged on the strength of our response."
The Financial Conduct Authority and the Commodity Futures Trading Commission are also expected to examine the role of banks that were not part of Wednesday's settlements.
The Swiss Financial Market Supervisory Authority, known as Finma, ordered UBS to disgorge 134 million Swiss francs, or about $138.4 million, after the regulator found that UBS employees in Zurich attempted to manipulate currency benchmark rates over an extended period of time and acted against the interests of their clients.
Finma also said that it had initiated enforcement proceedings against 11 current and former UBS employees and managers. The Swiss regulator said that shortcomings that emerged during investigations of three other Swiss banks regarding potential misconduct in foreign exchange trading could be remedied by corrective supervisory measures, without enforcement action. Finma did not identify those banks.
Separately, a Bank of England committee on Wednesday published the results of an investigation into whether any Bank of England officials were involved in, or aware of, conduct issues in the foreign exchange markets between 2005 and 2013.
Lord Grabiner, a prominent lawyer and Queen's counsel, determined that there was no evidence that any Bank of England officials were involved in unlawful or improper behavior in the markets, nor in the misconduct of foreign exchange traders sharing confidential information, including aggregated information about client orders, which was used for improper dealings.
One Bank of England official was aware that bank traders were sharing information for so-called matching, a practice that is not illegal but that could involve collusive activity and lead to other market participants being disadvantaged, the central bank said. The employee did not properly report these issues.
"This constituted an error in judgment that deserved criticism," the Bank of England said in a statement, "but such criticism should be limited in that the individual was not acting in bad faith, nor was the individual involved in any unlawful or improper behavior, nor aware of specific instances of such behavior."
The settlements come just over two years after the reputations of some of Britain's biggest banks were rocked by admissions that their employees had conspired to manipulate global interest rate benchmarks, specifically the London interbank offered rate, or Libor.
Last year, British lawmakers made it illegal to manipulate Libor, and they are considering whether to police more benchmarks after an examination by regulators of practices in the wholesale financial markets including the fixed income, currency and commodity markets.
©The New York Times News Service
