State Street Bank to Settle FX Overcharges Lawsuit and Investigations

The Wall Street Journal reported that State Street is finalizing a settlement with the DOJ, SEC and Labor Department (due to ERISA clients), as well as lawsuits filed on behalf of investors including CalPERS and CalSTRS pension funds. The dollar amount is expected to exceed $500 million (BNY Mellon settled a similar suit last year for over $700 million). The suit involves standing instruction trades - custody FX trades executed automatically based upon an agreement with the customer. The lawsuit charges that while the bank promised to execute these trades at market prices, there were undisclosed markups in the rates provided to clients.

These charges were different and preceded the FX benchmark manipulation charges and lawsuits, to which State Street was not a part. Here the State Street charges were that the bank contractually agreed to provide market prices but instead provided clients with worse rates. The charges only relate to standing instruction trades, typically used for "smaller" FX trades by the custody clients of banks.

Banks Settle Interest Rate Manipulation Lawsuit

Seven banks have settled a class action lawsuit brought in the US regarding the ISDAfix. The ISDAfix is a benchmark rate used in daily pricing of trillions of US dollars in derivatives, including interest rate swaps, futures and exchange traded options. The seven are JP Morgan, RBS, Deutsche, Credit Suisse, Barclay's, Citi and BOA.

The lead law firm, Scott + Scott, is the same as in the FX benchmark manipulation class action suit. The charges are similar to the FX suit and to the LIBOR charges as well. The charges included placing numerous orders at the close ("banging the close"), collusion leading to to submission of identical orders and placing off-market rates. Eight other banks remain in the suit. If this follows the trajectory of the FX suit, banks that settle later will tend to pay larger settlements.

What Does the New Treasury Currency Watch List Mean?

A recent US law requires the Treasury to publish an annual list of countries that may be manipulating their currency. This first list does not name any country as a manipulator but mentions China, Germany, Japan, South Korea and Taiwan as countries that exceed one or two of the three criteria for being named as such -

1) an annual bilateral trade surplus with the US exceeding $20 billion
2) a current account surplus exceeding 3% of GDP
3) FX market interventions exceeding 2% of GDP in a given year

Prior Treasury reports on currency manipulation were based upon fuzzy guidelines and the intention of the new rules is to hold Treasury to using specific financial/economic data with the intent of more frequent designations of manipulation (the most recent Treasury designation was of China in 1994).

Will these new rules lead to more currency manipulation designations? Our answer is probably not. While the first two metrics are fairly clear the third is not always. FX market interventions are not necessarily publicized (even if highly suspected). As well, in a time of quantitative easing (QE), it is far from clear if selling one's currency and buying others is the only way to intervene in currency markets. It is often suspected that at least part of the reasons for QE, even if unmentioned publicly, is to weaken the local currency. As such, rules focusing on direct interventions may miss, or cause the increased use of, indirect currency interventions.