First FX-rigging settlement fines 5 banks $3.3 billion

November 12, 2014 05:04 AM

Regulators in the U.S., Britain and Switzerland ordered five banks to pay about $3.3 billion in the first wave of penalties since authorities began a global probe into the rigging of key foreign-exchange benchmarks last year.

Switzerland’s UBS AG was ordered to pay the most at $800 million, according to statements from the U.S. Commodity Futures Trading Commission, Britain’s Financial Conduct Authority and the Swiss Financial Market Supervisory Authority. Citigroup Inc. will pay $668 million, followed by JPMorgan Chase & Co. at $662 million. Royal Bank of Scotland Group Plc was fined about $634 million and HSBC Holdings Plc $618 million. Barclays Plc, which had been in settlement talks, said it wasn’t ready for a deal.

Banks and individuals still face further penalties from other agencies as a result of dealers colluding with counterparts at other firms to rig benchmarks used by fund managers to determine what they pay for foreign currency. The U.S. Justice Department and Britain’s Serious Fraud Office are also leading criminal probes into the $5.3 trillion-a-day currency market.

“The traders put their own interest ahead of their customers, they manipulated the market -- or attempted to manipulate the market -- and abused the trust of the public,” FCA Chief Executive Officer Martin Wheatley told reporters at a briefing in London today. The regulator will press firms to review their bonus plans and claw back payments already made.

The U.S. Office of the Comptroller of the Currency may also announce penalties later today and the Federal Reserve said it is working with the Justice Department in the probe. Finma also said it has started enforcement proceedings against 11 UBS employees.

‘Less Optimistic’
“Many will see this as drawing a line under this sad episode,” said Tim Dawson, an analyst at Helvea SA in Geneva who covers financial firms. “We are less optimistic,” he said. The banks are “likely to face a heavy burden of potential litigation in coming years.”

UBS fell 0.2% to 16.71 francs in Zurich, while RBS slipped 0.8% to 374.60 pence. Barclays fell 2% to 229.90 pence as of 1:54 p.m. in London trading. By delaying, Barclays won’t now receive the 30% reduction in its penalty the FCA awarded the other banks settling today.

The FCA isn’t planning to fine Deutsche Bank AG, the second biggest player by market share in foreign exchange. Credit Suisse Group AG has also been given the all-clear from the U.K. regulator, a spokesman for the Swiss bank said.

Unanswered Questions
“Barclays is the only bank we are currently investigating from an enforcement perspective,” Tracey McDermott, the FCA’s director of enforcement, said. About 30 other banks, including Deutsche Bank, will still have to overhaul their practices.

While the FCA has completed its probe in less than half the time it’s taken to investigate the rigging of Libor and other interest rate benchmarks, lawyers said the settlement leaves unanswered how clients will be compensated.

“The fines alone are not sufficient, and there is plenty more work for the regulator to do to ensure that those customers affected are properly compensated,” said Stevie Loughrey, a lawyer at London-based law firm Carter-Ruck. The fines “will offer no comfort whatsoever to those bank customers who have suffered significant losses.”

Separately, the Bank of England dismissed its chief foreign exchange dealer, Martin Mallett, who has worked at the bank for almost 30 years. He was faulted in a report by Anthony Grabiner for failing to alert his superiors that currency traders were sharing information about client orders.

WM/Reuters Rates
Mallett didn’t respond to e-mails and telephone calls seeking comment. A spokesman for the bank said Mallett’s dismissal wasn’t linked to Grabiner’s report but in relation to an internal disciplinary process unrelated to foreign-exchange.

The probes were initially into whether traders colluded to manipulate the WM/Reuters benchmark rates. They have expanded to include whether traders used confidential information to take bets on unauthorized personal accounts, and whether sales desks charged clients excessive commissions. More than 30 traders have been fired, suspended, put on leave, or resigned since the probes began last year.

The FCA said its fines relate to “ineffective” controls at the banks between Jan. 1, 2008 and Oct. 15, 2013 that allowed the banks to put their “interests ahead of those of their clients, other market participants and the wider U.K. financial system.” These failings allowed traders at the banks to behave “unacceptably,” the FCA said.

Sharing Information
“They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G-10 spot foreign-exchange currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market,” the FCA said.

Today’s settlement includes the FCA’s largest-ever fines and marks first time the regulator has entered into a settlement with a group of banks. Previously, the regulator’s largest fine was a 160 million-pound penalty against UBS over the manipulation of the London interbank offered rate in 2012. The FCA announced its formal probe in October 2013, four months after Bloomberg News reported traders colluded to manipulate the WM/Reuters rates.

The FCA said it plans to “progress” its probe into Barclays, which wasn’t part of the settlement, to cover its wider foreign exchange trading business.

“We will continue to engage with these authorities, including the FCA and CFTC, with the objective of bringing this to resolution in due course,” Barclays said in a statement.

‘Severely Violated’
UBS, Switzerland’s largest bank, was ordered to give up 134 million Swiss francs ($139 million) in profit after the Zurich- based bank was found to have “severely violated” the requirement for proper business conduct in currency markets, Finma said.

The six banks, including Barclays, have set aside about $5.3 billion in recent weeks for legal matters, including the currency investigations.

The fines come more than two years after the first banks settled with U.K. and US authorities over allegations they rigged the London interbank offered rate, a benchmark interest rate used in $300 trillion of securities including swaps and home loans. A dozen firms have so far been fined at least $6.5 billion in investigations related to Libor and its derivatives. UBS was fined about $1.5 billion in that probe.

The Libor investigations, which have not yet concluded, sparked a broader review of dozens of benchmarks used in markets from oil to precious metals.

About the Author