Canadian FX Civil Suit Follows US Settlement Track

Three banks settled a civil suit in Canada relating to the FX benchmarking scandal. UBS, BNP Paribas and Bank of America settled for a total of about 16 million Canadian dollars. In addition, as in the US case, the banks that settled early are hoping to be let off with relatively low payments in exchange for offering to provide information that will help in the investigation of other banks named in the suit. The settlements do appear on the low side relative to the first three settling banks in the US case (about 5% of those settlements) and the Canadian suit amount of $1 billion Canadian dollars. While we can expect remaining banks to pay higher settlements than these, of course they will be well below those in the US, which has a much larger FX market.

Currency Rigging Civil Lawsuit - Full Speed Ahead!

While a judge's ruling this week was reported in much of the press as having limited the scope of the civil lawsuit against the remaining non-settling banks, the major portion was retained and the judge said that the "complaint sufficiently pleads both the existence of a conspiracy to fix benchmark rates and bid/ask spreads, and the non-settling defendants’ participation in that conspiracy". So the case proceeds against the remaining banks on US FX transactions, not limited to benchmark fixes, but FX prices in general. Only certain non-US transactions and transactions before December 1, 2007 were dismissed.

The case against the remaining banks (Bank of Tokyo-Mitsubishi, Credit Suisse, Deutsche Bank, Morgan Stanley, RBC Capital Markets, Société Générale and Standard Chartered Bank) will proceed under antitrust laws and the Commodity Exchange Act. Settlements for individual banks that have settled or are awaiting approval for settlement, have ranged between approximately $100 - $400 million. Snark warning - A collective sigh of "we should have settled" was heard from the remaining banks after the ruling.

State Street Bank Settles FX Custody Trading Suits

In 2009 a whistle blower filed a suit on behalf of CalPERS and CalSTRS, alleging hidden markups in the FX rates given to custody clients when they used the "standing instructions" custody method of FX trading. State Street has settled this suit, DOJ, SEC and DOL investigations, as well as a private client lawsuit relating to FX matters, totaling $530 million. In effect this wipes the slate clean for State Street relating to FX pricing matters.

The suits alleged that markups were hidden from clients, while certain custody clients were told by State Street that rates were based on interbank market rates. In the settlements State Street acknowledges that markups were taken.

While these issues are quite different than the more general FX benchmark manipulation and other related charges settled by numerous banks, Bank of New York and State Street, two major custody players, were hit with charges related to "standing instructions" pricing. These trades tend to be numerous, small "nuisance" trades that, however, could be quite profitable to the banks with large markups in price. Since the original suit was filed, custody banks have become more transparent, and now typically provide known fixed spreads to their clients on such trades.

DOJ Charges HSBC Traders with FX Front Running

In the DOJ's first charges against individuals in the FX market investigations of the last three years, HSBC's head of FX trading and a former colleague were charged with using inside information from a large forthcoming client trade to make an $8 million profit for the bank (and we assume thereby increasing their bonuses).

While many charges have been made and settled with the banks, here individuals are being charged, perhaps in response to claims that just as in the financial crisis, fines are levied but no individuals are held responsible. Earlier this week the Fed barred a UBS trader from the currency markets for life, due to participation in the FX currency benchmark rigging scandal. There may be a few more charges to come both in the US and Europe, for regulators to show that more than financial penalties against the banks will be levied in this and any future financial scandals.

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.