Record fines of $5.7billion for rigging of foreign exchange

The US department of Justice has announced a law enforcement action against financial institutions that participated in a display of collusion and foreign-exchange rate market manipulation. They will pay a total of nearly $3 billion in fines and penalties. This is on top of a further $1.8bn dollar fine from the Federal Reserve and fines from the UK Financial Conduct Authority totaling $5.7 billion.

Speaking at a press conference today, the Attorney General Loretta Lynch said “Starting as early as 2007, currency traders at several banks formed a group they dubbed the cartel…Almost every day for five years, they used a private electronic chat room to manipulate the exchange rate between euros and dollars using coded language to conceal their collusion. They acted as partners rather than competitors to push the exchange rate in directions favorable to their banks, but detrimental to many others. ..Four of the largest banks have agreed to plea guilty to antitrust violations. Citicorp, J.P. Morgan Chase and company, Barclays, and the Royal Bank Of Scotland. These banks having acknowledged their role in this conspiracy and are committed to changing corporate cultures starting at the highest levels. They have agreed to pay criminal fines totaling more than 2.5 billion dollars. The find that Citicorp alone will pay, $925 million, is the largest fine ever imposed for a violation of the Sherman act. These figures appropriately reflect the conspiracies , the systemic reach and significant impact. A fifth bank, Switzerland’s UBS has agreed to pay a criminal penalty for breaching the non-persecution agreement The breach of the nonprosecution agreement was based in part on UBS’ fraudulent sales practice related to exchange markets and its failure to take adequate action to prevent unlawful conduct after prior civil, criminal, and criminal resolutions. UBS promised not to commit additional crimes, but it did. This represents the first time in recent history that the department of justice has found a company breached a nonprosecution agreement over the objection of that company.”

Mr. Baer: “We have demanded and secured parent-level guilty pleas, secured record fines of more than $2.5 billion and insist upon three years of court supervised probation for each of the banks. …Exchange rates are prices to buy and sell currency. They should be set competitively. Instead, the members of this cartel chat room conspired to gain profit by manipulating the exchange rates. The banks pleading guilty are not ordinary market participants. They are market makers. They represent 25% or more of dollar-euro exchange rate transactions each year. They agreed to rig fixes. These fixes are designed to be snapshots of the euro-dollar exchange rates reported by unbiased third parties. The snapshot rates become the price paid for billions of dollars of currency bought or sold on any given day. The cartel conspirators used chat room communications in minutes and seconds leading up to the snapshot moments to move the fixed price in the direction most profitable to them, cheating customers. Second, members of the cartel hatched plans to consist — to protect the conspiring banks by agreeing to hold off buying or selling dollars and euros. By not trading at these times , or standing down, members of the cartel minimized price movements and helped each other close out of their open positions profitability at the expense of customers and counterparties who expected and were entitled to receive a competitive dollar-euro exchange rate. It is imperative these banks accept full responsibility for these acts and carry through on their commitments to change the culture that allowed this behavior to go on for years without detection.”

Speaking on behalf of the CFTC, Mr. Goelman said “With today’s actions , the CFTC has brought 15 cases alleging benchmark abuse. We are announcing two significant benchmark settlements. First, Barclays has agreed to pay a fine for attempting to manipulate and false reporting relating to foreign exchange benchmark rates. This brings the total fines obtained by the CFTC to almost $1.9 billion. We are announcing the first settlement of a third major benchmark manipulation investigation. In addition to Barclays settlement, the bank has also agreed to pay 100 $15 million for attempting to manipulate and making false reports. The rate that Barclays attempted to manipulate is used for cash settlement of interest rate options and a wide range of other financial products.”

Speaking specifically about the Barclays judgement, Georgina Philippou, the FCA’s acting director of enforcement and market oversight said:

“This is another example of a firm allowing unacceptable practices to flourish on the trading floor. Instead of addressing the obvious risks associated with its business Barclays allowed a culture to develop which put the firm’s interests ahead of those of its clients and which undermined the reputation and integrity of the UK financial system.  Firms should scrutinise their own systems and cultures to ensure that they make good on their promises to deliver change.”

Responding to the judgement JP Morgan responded by saying: “The conduct underlying the antitrust charge is principally attributable to a single trader (who has since been dismissed) and his coordination with traders at other firms. Jamie Dimon, Chairman and CEO of JPMorgan Chase, said: “The conduct described in the government’s pleadings is a great disappointment to us. We demand and expect better of our people. The lesson here is that the conduct of a small group of employees, or of even a single employee, can reflect badly on all of us, and have significant ramifications for the entire firm. That’s why we’ve redoubled our efforts to fortify our controls and enhance our historically strong culture.”

ACI President, Marshall Bailey has also commented: “These charges make sobering reading and are another wake up call to the FX market that it needs to address behavioural issues. Foreign exchange is the world’s largest market and most important market, as it facilitates trade and economic activity. It is vital that we regain trust in its operation. It must operate to the very highest standards. Clearly some in the market have fallen short of this standard.

“As many of the issues the market experienced are due to individual conduct, it is critical to embed a strong culture of individual accountability and reinforce the right messages across all staff members.

“There is now a real chance to learn and to ensure the right practices are applied and that regulators and market practitioners are working closely to establish a common set of standards and the best behaviour possible, based on an industry standard single code of conduct.