- Early on the morning of November 12, regulators from three countries levied $3.3 billion in fines against five banks for illegally colluding to manipulate foreign exchange markets.
- The targets are UBS, HSBC, the Royal Bank of Scotland, JP Morgan Chase, and Citibank. The fines were levied by the United States, the United Kingdom, and Switzerland.
- The fine is a record for Britain’s Financial Services Authority, though the US and Swiss regulators who joined in the settlement have issued bigger penalties in the past.
- The settlement does not resolve an ongoing criminal investigation by the US Department of Justice into the matter.
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The background
The case does not have anything to do with the major themes of the financial crisis, except in the very broad sense that it involves bank misconduct. At issue is trades in the foreign exchange (forex or FX to the cool kids) markets, where dollars are swapped for yen and euros for Swiss francs. In most markets, it is illegal for traders to engage in a practice known as front running where a dealer uses his knowledge of clients’ proposed trades to make profitable trades in advance.
For example, if you know your client wants to buy an enormous amount of General Motors stock you could go buy GM shares for yourself and take advantage of the price hike that will be induced by your client’s purchase. You could do it, that is, except it would be illegal.
The foreign exchange markets are not regulated in this way, and front running is not against the rules. That’s because traditionally regulators have taken the view that the FX market is too big to be profitably manipulated in this way. But it turns out that traders from different banks were cooperating with each other to coordinate moves and make front running possible.
Regulators charge that this coordination was illegal. Since the banks have settled the charges and agreed to pay fines, they are not defending the conduct. But outside skeptics of the charges note that this is more a case of regulators changing their mind about what’s allowed than of scandalous new conduct.
could almost summarise the FX thing as "clients didn't ask for best execution, they didn't pay for it but by God they should have got it!"
— Dan Davies (@dsquareddigest) November 12, 2014 Why it matters
The fines themselves are of relatively little consequence; the banks involved can absorb the losses. What’s interesting is that while industry insiders have continuously hoped that the regulatory environment would get laxer as we moved further from the financial crisis, actual political developments seem to have gone in the opposite direction.
But the UK government is levying bigger fines than ever before, and a US Justice Department which has long been gun-shy about criminal charges is now attempting to build a case. This is not the direction the financial services industry wants to see things move in, but it indicates that regulators are continuing to feel public pressure to show they’re serious about financial misconduct.
