Estimate of Regulator Fines on Banks for FX Fix Misconduct - $41 Billion

Bloomberg reported that Citibank analysts' estimate of fines relating to the FX fix could total over $40 billion between US, UK and European regulators, spread among money center banks.  The analysis excludes fine reductions or waivers for those banks cooperating with investigations.  As many banks are cooperating (some required to do so by their agreements with regulators in the LIBOR scandal) this might substantially reduce the actual fines.

As most banks have been reserving for these investigations, which started in the middle of last year, there may not be a big hit to the earnings of the banks as a whole from the eventual fines.  As to reputational hits, the fact that so many banks will be included may, in effect,  protect all of them.

Banks moving swaps overseas

The WSJ reports today (disclosure: I'm quoted in the article) that banks are moving their swap businesses (in particular credit default swaps) overseas. According to the article, this move could be to avoid the stricter regulatory environment in the US. While some see this as potentially reducing risk here in the US, others worry that risk isn't being reduced but rather just shifted around. 

What do you think?

UBS Said to Cooperate in FX Investigations in a Bid for Immunity

Bloomberg today reports that people familiar with the investigations say that UBS is cooperating with regulators in the US and the EU into the benchmark FX allegations and will disclose any wrongdoings.  As we have reported in prior posts, there is a huge incentive for all banks to consider this course of action, and we would be surprised if other banks are not doing/planning to do so.  The biggest benefits go the first movers and so there should be a rush to the investigators, as many banks have mounted internal investigations to uncover wrongdoing.  In addition, it has been previously reported that LIBOR settlements require many of the banks to cooperate in any benchmark rate investigations.

LIBOR Settlements may Ease the Investigations into Potential FX Benchmark Manipulation

This Financial Times article highlights the weak position in which the money center banks find themselves vis-a-vis the regulators' investigations into potential manipulation of FX benchmark fixes.  In addition to the potential for large fines and a wave of civil litigation, as reported to the FT by the US DOJ, the LIBOR settlements for several banks included pledges for the banks to co-operate with investigations into all benchmark manipulations.

Thus in addition to banks co-operating to uncover any wrongdoing by their employees, or to seek a first mover advantage in securing possible leniency or immunity, these prior agreements may be part of the reason for the reports of numerous investigations and quick turning over of findings by banks.

What Happens When the Investigators Investigate Themselves?

No, the title of this post is not a Zen meditation question.  News comes that the BOE has hired outside counsel to investigate whether its own staff condoned practices at the heart of the FX manipulation controversy.  This disclosure shows an uncomfortable repeat of the accusations in the press that the Federal Reserve knew about the alleged LIBOR manipulation before it was disclosed to the public.  Of course this also brings to mind criticisms from Democratic legislators, most notably Senator Warren, about the close relationships between regulators and banks. Assuming that the conversations between the banks and the BOE regarding FX trading did occur as reported by the media, there's a reasonable argument to be made that banks should be able to rely on whatever approvals the BOE officers gave them. In which case, why did the BOE officers not recognize problematic behavior in the first place?  Or, more troubling, did they acknowledge the questionable behavior but provided cover to the banks anyway? So many questions and so few answers in all of these market manipulation matters. 

May a Bank "Tell-All" to Regulators Regarding FX Benchmark Rates?

This article discusses prior investigations by regulators and the incentives to the first mover to cooperate.
http://www.sfgate.com/business/bloomberg/article/Banks-Said-to-Snitch-on-FX-Competitors-in-Race-to-5080967.php