While Wednesday's settlement is among the first tied to the $5.3 trillion-a-day foreign exchange market, it resembles similar investigations into the manipulation of interest rate benchmarks and is likely to lead to billions more in fines and legal costs, in addition to criminal inquiries.
The FX market probe, led by the U.S. Commodity Futures Trading Commission, Britain’s Financial Conduct Authority and the Swiss Financial Market Supervisory Authority, hinges on traders' use of instant messages to coordinate their buying and selling of currencies at the market close to manipulate foreign exchange prices in their favor.
"[I]’d prefer we join forces,"
"lets do this… lets double team them,"
"[A]re we ok with keeping this as is ie the info lvls & risk sharing?"
Those are kinds of instant messages, overtly referencing the manipulation of markets, which have wound up costing UBS, Citigroup, JPMorgan, HSBC and RBC a total of $3.3 billion. They also shed new light onto over-the-counter trading on Wall Street, where traders often negotiate deals with little oversight.
Regulators alleged that FX traders at the banks involved in Wednesday's settlement conspired to manipulate the World Markets/Reuters Closing Spot Rates (WM/R Rates) benchmark to benefit their trading books. The WM/R Rates benchmark, while esoteric outside of Wall Street trading desks, is used for across foreign exchange markets and is key to the pricing of major currencies like the U.S. Dollar, the Euro, the Japanese Yen and the British Pound Sterling.
"[T]oday’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated,” said Tim Massad, chairman of the CFTC, in a statement.
"The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system," added Martin Wheatly, chief executive of the FCA. The FCA further characterized the banks involved in its settlement as having committed "the worst misconduct."
UBS agreed to pay the largest fine at $800 million, even as regulators acknowledged the bank was first to cooperate on the probe. The other involved paid between $668 million and $618 million in total fines.
Separately, the Office of the Comptroller of the Currency (OCC) said late on Wednesday morning it has assessed a $950 million against Bank of America, Citigroup and JPMorgan for "unsafe or unsound practices" tied to their foreign exchange trading.
While the OCC assisted the CFTC and FCA's investigation, its fine comes on top of the $3.3 billion banks are already paying, and draws in Bank of America.
Citibank and JPMorgan will pay $350 million apiece to the OCC, while Bank of America will pay $250 million, the regulator said on Wednesday.
Earlier in November, Bank of America took a $400 million charge against its third quarter earnings as a result of its foreign exchange business.
Barclays may soon find itself writing a large check to banking regulators in the U.S. and Europe. Meanwhile, U.S. lenders including JPMorgan and Citigroup have also recently disclosed criminal probes into their foreign exchange trading activity.
Barclays confirmed on Wednesday it had engaged with the CFTC and FCA on a settlement, however, the firm withdrew from talks to seek a wider resolution of its FX-market activities with regulators in the U.S.
"In relation to Barclays Bank Plc, we will progress our investigation into that firm which will cover its G10 spot FX trading business and also wider FX business areas," the FCA said.
Wednesday's settlement was assisted of the U.S. Department of Justice, the Federal Bureau of Investigation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the FCA, and FINMA.
Foreign exchange fines and prosecutions come on the heels of similar global probes into the setting of interest rate benchmarks such as the London Interbank Offered Rate (LIBOR). Like foreign exchange, much of the trading in interest rate markets is done over instant message and markets trade based off of benchmarks that are heavily influenced by large banks.
In interest rate probes probes, regulators dug up communications that showed traders conspiring with so-called LIBOR submitters to have the daily fixing of the benchmark work in the favor of their trading books. Unsurprisingly, even after banks have paid billions in fines to settle LIBOR-related litigation, foreign exchange traders used similar tactics to manipulate their markets.
That revelation underscores a general lack of control by large institutions to monitor their traders and a blindness by regulators into over-the-counter markets.
“Firms could have been in no doubt, especially after Libor, that failing to take steps to tackle the consequences of a free for all culture on their trading floors was unacceptable," Tracey McDermott, the FCA's director of enforcement and financial crime, said on Wednesday.
"This is not about having armies of compliance staff ticking boxes. It is about firms understanding, and managing, the risks their conduct might pose to markets," McDermott added.
The CFTC and FCA have asked banks to strengthen their internal controls as a result of Wednesday's probe. Already, most banks have banned the group chat-rooms where manipulative activity has been most acute.
Last year, Bloomberg increased the compliance features of its popular instant messenger as large banks worked to get a better grip over their traders.
Citigroup, Bank of America and JPMorgan were less than 1% lower in Wednesday trading, performing slightly worse than the wider market.
