JPMorgan Settles FX Benchmark Manipulation Lawsuit

Reuters reports that JPMorgan settled an antitrust lawsuit which accused 12 banks of rigging the FX markets' benchmark rates. No other bank has commented or settled as of yet, and the terms of the settlement were not disclosed. Two other lawsuits remain.

This follows the fines imposed by certain regulators on several banks late last year on the same matter. Once regulators found wrongdoing, even if only poor oversight of traders, it becomes more difficult for the banks to defend themselves. The lawsuit depended on whether the banks' behavior was uncompetitive in nature. Regulator findings regarding collusive behavior among bank traders on chat room and other electronic media may have increased the pressure on banks for settlements.

It appears reasonable to expect some of the other banks to settle in the near future. Additionally, all of the US and international regulators have not yet weighed in, and criminal charges may be coming as well, although any such charges may be limited to individual bank traders rather than the banks themselves.

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.

Regulators/Prosecutors Moving Forward in UK and US FX Benchmark Investigations

Reuters sources  indicate that in the UK there is a push being made by the banks to come to a joint settlement with the FCA regarding the benchmark FX investigation.  A joint settlement reduces the reputational risk for each bank and would allow for the FCA to wrap up the investigation more quickly than pursuing each bank individually.  Indications are that such a settlement, if it occurs, could come as early as year end.

In the US there is a report that the DOJ has informants still working on the fx desks at several US banks. The DOJ is looking to charge individuals with crimes as an additional deterrent to the fines on the banks.  Perhaps it may also avoid a repeat of the criticism of the regulators following the LIBOR investigation that fines alone are merely a cost of doing business for the banks.

Another Shoe Drops: Pension Sues Banks Alleging Manipulation of ISDAfix

Hot off the presses, Bloomberg reports that the Alaska Electrical Pension Fund yesterday filed suit against the banks responsible for contributing to the ISDAfix rates. Those of you who want more about this brewing controversy can read my report here.  This comes on the heels of lawsuits alleging manipulation in gold, FX rates and LIBOR.  I'm sure there will be more to come as additional information comes to light. 

Regulatory Investigations of the FX Markets are Progressing

Bloomberg reports that the U.K.'s FCA is trying to speed up settlement talks with the banks by keeping the settlement narrowly focused.  The FCA is hoping for a settlement before year end, much earlier than previous reports.  The SFO in the UK has recently begun a criminal investigation and the director said that charges could come next year.  It is reported that the DOJ's investigation could bring charges and impose fines as early as this year.

The WSJ also reports that a number of banks are negotiating with the UK's FCA that any settlement will be announced at the same time for all of the banks.  This is an attempt to avoid the LIBOR scenario where each bank settlement was announced separately, bringing considerable bad publicity to each.  Perhaps a cross bank settlement would spread such publicity around and also draw attention to the misconduct being more of a market-wide problem rather than any bank being a bad apple.

New York's bank regulator, the Department of Financial Services, is negotiating with Barclay's and Deutsche Bank to install monitors at the two banks to investigate whether trades manipulated FX currency benchmark rates.  This was reported by the Wall Street Journal , but both banks declined comment.

All in all it sounds as if the regulators are attempting to fast track the investigations.  Earlier this year the FCA had mentioned 2015 as a goal and BAFIN in Germany had mentioned completion in 2018, hopefully. Speed will be helpful for all involved - the banks, regulators, and oh yes, market participants.  The discussions on changes to benchmarks is ongoing publicly, but no solution is perfect - longer windows of trading which seems to be a favorite, mitigates but does not eliminate the possibility of misconduct and a benchmark that is more of an average rate for the day is not what all market participants are looking for.

US DOJ Offers Immunity to Junior FX Traders in London

Reuters reports this interesting tactic which is not available to prosecutors in civil cases.  One can infer from this that the investigation into FX benchmark rigging has not made enough progress to bring any suits, but that the prosecutors believe that misconduct has occurred.  Will these offers of immunity bring in the information on senior traders and bank practices that the DOJ is looking for? Although that is uncertain, it will certainly make for some uneasy relationships within the FX trading community.

Reports of FX Traders Colluding on NonBenchmark Trades

Many of the charges in the FX manipulation  media reports are possibly explicable as banks carrying on risk management before and during benchmark fixings.  Without further details we do not know if there has been misconduct.  However, the reports of collusion between major banks in the time period when London Close FX rates are established certainly means that, if true, the banks were involved in misconduct.

Now Reuters reports that the British regulator, the Financial Conduct Authority, has chat room transcripts of top traders from three large banks in London discussing the spreads to be put on specific, apparently large non-benchmark trades.   If true, then collusion extended beyond benchmark trades to the general FX market as well.  As allegations continue to come out from the FX and other markets, conspirators who have long alleged that banks controlled "the markets" are looking less and less crazy and leading some to wonder just how pervasive was misconduct.  As reported here last week, estimates of regulator FX fines to come for banks are as high as $35 billion.  Such magnitude is apparently effecting banks and recent reports have mentioned that banks are moving to further increase their proportion of electronic trading as there is less regulatory risk and less chance of misconduct on the part of traders.

Report that DOJ is Investigating FX for being ... an OTC Market

Bloomberg reports today that people with knowledge of the matter say that the Department of Justice is looking into the practice by banks of charging different size markups to different clients, based upon how closely they watch market rates.  The DOJ is looking into whether not disclosing this practice represents fraudulent behavior.

FX, as an OTC market, does not charge commissions but instead banks earn profits by charging a markup on the rate to clients.  References in the article are to bankers executing trades that are sent to them via email, and then waiting some time to see if the later currency rate allows them to charge a worse rate to the client (this is similar to the fact pattern in the standing instructions lawsuits ongoing against several custodial banks).  In fact, all FX OTC trades, however initiated, include varying markups, based upon client relationship and client credit among other factors, including how closely the client watches market rates.

Buyer beware, whether buying FX or going to the store to buy milk, should be the underlying principle that protects buyers from unscrupulous sellers (and sellers from an overreaching government).  If the longstanding implications of the OTC market (unequal pricing) are no longer acceptable, what are the alternatives?  The least intrusive might include a warning notice about the OTC FX market, provided when opening an FX account (this account may be hazardous to your financial health).  The most would be to change the regulatory regime and create an exchange traded spot and derivative FX market, potentially to the detriment of the majority of market participants who benefit from a low cost, highly liquid market.

Regardless, the FX custodial lawsuits were followed by FX benchmark suits, and this leads me to suspect that there will be another wave coming.

Financial Times: DoJ raises stakes in forex probe

The Financial Times reports that US DOJ criminal prosecutors have traveled to London as part of its forex probe to interview people potentially involved in the alleged manipulation of the forex market. The article points out an interesting distinction between US and UK law, where the US has the right against self incrimination whereas the UK authorities can compel potential defendants to answer questions. While there has been a lot of smoke regarding the forex investigations, many of us are still waiting to see the fire. What exactly did the banks do and how did they do it and for how long?  Leaks to media sources are not the best way for the public at large to understand the scope of this thing. 

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.

In FX it's Not just the Fix under Investigation; Are Banks Racing to the Regulators?

In addition to the fix and traders trading for their personal accounts, banks are reported to have found instances of traders providing "sensitive information" (which we assume to be customer orders) to other customers and of having traded against their clients' interests by defending or preventing a breach of fx levels that will cause the client to receive an option payout.
WSJ

These allegations are reported to have been uncovered by banks during internal investigations of the fix allegations.  That leads us to this article by Reuters which says that UBS approached investigators last September to provide evidence of misconduct in an effort to get preferential treatment from the regulators when/if punishments are meted out to banks.  We had a prior post regarding the 'first mover advantage" to a bank being the first to provide evidence to regulators (see here May a Bank Tell All to Regulators?)

Bloomberg: BOE Staff Said to Have Condoned Currency Traders’ Conduct

Bloomberg reports that the Bank of England staff may have known and possibly "blessed" the sharing of information that appears to be at the heart of the investigations re: fx manipulation.  Could this provide legal cover for the banks?  How much did BOE know?  Are we surprised?  

Doubling Down: Bitcoin Evangelist Won't Back Down

Dealbook reports that Charls Shrem, one of the most visible advocates of Bitcoin, has not backed down from his support of the virtual currency, despite his arrest and accusations of money laundering.     The post mentions Mr. Shrem's dreams of a Bitcoin debit card, different business such as a private charter jet company or a bar taking Bitcoin.  In particular he noted that "Bitcoin really allows you to have such a global life — it allows you to be able to move anywhere within days if you want to."  Let's see, I can travel internationally now at a moment notice, use debit cards, buy drinks and charter a jet (if I had the money).  So what exactly does Bitcoin provide that real currencies cannot? 

Reuters Describes the Path that FX Manipulation Cases will Need to Follow

Based upon the allegations to date (no regulatory investigations have been completed) and the class action antitrust cases filed, the article highlights some of the issues that the plaintiffs will need to prove:
- that there has been anti-competitive collusion and that it rises to the level of antitrust behavior under the Sherman Act
- although there are differences from the LIBOR case, those antitrust claims were dismissed by a New York federal judge
- certifying a class when on any given day any alleged manipulation may help or hurt a particular plaintiff, depending upon the direction of the manipulation and the plaintiff's position.
Reuters

These are valid points relating to the potential difficulty of these antitrust suits. From the banks' perspective, at least as important will be the result of the regulators' investigations. Should these show manipulation to have occurred, even if problems are found with these suits, a subsequent set of lawsuits could reasonably be expected. Thus, regardless of the outcome of these suits, the banks may not be able to remove themselves very easily from another set of legal troubles in the event that the ongoing investigations find misconduct.

The Long Reach of the Foreign Corrupt Practices Act

Today's WSJ reports on the probe by the DOJ investigating whether financial firms such as Goldman Sachs, Credit Suisse, JPMorgan, Och-Ziff Capital Management and even Blackstone have violated the anti bribery law in their dealings with Libya.

This follows other reported ongoing investigations into other famous firm-country pairs such as Wal-Mart - Mexico and JPMorgan - China.

FCPA investigations are highly fact intensive that can translate into large legal bills.  For example,  Wal-Mart supposed haas spent over $230 million with no end in sight.

The range of the investigations publicized (and I'm only talking about the high profile cases) shows that the government will look at alleged misconduct worldwide, but they won't take every case that's publicized. For example, I wonder whether the SEC or the DOJ is taking any action on the alleged bribery of UK police officers by News Corp. reporters.  

Bitcoin miner beware!

NY Times's Dealbook has reported that 2 executives of Bitcoin business have been arrested, accused of facilitating drug transaction on the now defunct website Silk Road.  Investors looking to profit from Bitcoin should tread carefully lest they be accused of being a part of a money laundering scheme.