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.

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.