This morning, the United Kingdom Financial Conduct Authority (FCA) and the U.S. Commodity Futures Trading Commission (CFTC) announced more than $3 billion in fines against five banks for manipulation of the foreign exchange market. As part of the settlement, the CFTC fined Citibank ($310 million), JPMorgan ($310 million), HSBC ($275 million), UBS ($290 million) and The Royal Bank of Scotland ($290 million), according to their press release.
The announcement by the FCA has been anticipated for a few weeks now as rumors swirled following bank announcements of funds set aside from earnings several weeks ago. The UK regulator reportedly offered banks a 30% discount for early settlement. Speculation over the course of the last few weeks has been that the CFTC would also participate.
This global settlement will not be the end of the announcements into forex manipulation, as there are additional banks and regulators who did not participate. There were rumors that Barclays would also participate in the settlement, but it reportedly pulled out of settlement discussions because of difficulties in reaching an agreement with New York’s Department of Financial Services. Bank of America has announced that it is in advanced discussions to resolve issues in its forex business with regulatory agencies. The Department of Justice is also reportedly pursuing a criminal investigation into conduct at JPMorgan Chase. And the Swiss Financial Market Supervisory Authority (FINMA), which fined UBS $139 million as part of this settlement, is investigating conduct by three additional Swiss banks as well.
What was happening?
Benchmark foreign exchange rates for 21 major currencies are set in London at 4 PM daily during a 60 second window of trading known as the “fix”. Known as the WM/Reuters benchmark rate, it is used to value investments held by pension funds and money managers across the world.
Traders at the five banks named here, as well as potentially a few others, were sharing information about pending client orders ahead of the 4 PM fix. They were also sharing information about their trades, leading to agreements to collaboratively buy or sell currencies in a way that manipulated the price set during the fix. Because of the information sharing between banks, normal market forces of supply and demand were not at work. Although the relevant time period varied by bank, the conduct happened between 2009 and 2012.
The CFTC released sections of chat transcripts from the banks at issue to provide examples of the market manipulation at issue. The chat room talk clearly indicates traders were disclosing information about the size and direction of their net orders prior to the close of the fix period.
The fines also covered inadequate internal controls put on the use of electronic communication and insufficient training for traders around FX benchmark rates.
Previously, several banks (including UBS and RBS) had been fined for similar conduct in connection with manipulation of LIBOR and other interest rate benchmarks.
Will a whistleblower emerge?
The countdown to a record-breaking award, if any, begins.
The CFTC will next announce a notice of covered action. This will give whistleblowers 90 days from the announcement to file Form WB-APP to claim a reward. The CFTC will then evaluate all of the claims submitted and make its award. This is spelled out in our section on their rewards procedure.
As we speculated last week, any payout could be substantial. The Dodd-Frank Act authorizes awards between 10 and 30 percent of the sanctions received by the CFTC. Although purely speculative, this raises the possibility of an award between $27 million and $420 million. There is also the potential for a higher award as the FCA fines could be considered a “related action” pursuant to section 165.11 of the CFTC rules. It seems likely that the FCA is a “foreign futures authority” under the rules.
To date, the CFTC Whistleblower program has lagged behind the Securities and Exchange Commission program, which was also authorized by Dodd-Frank. It receives less than 10% of the tips that the SEC does and has only announced one award to the ten from the SEC. However, the SEC’s largest award is only $30 million, and this settlement has the potential to lead to a reward well in excess of that one.