Dismissed Citi FX Trader Wins with "everyone else was doing it"

The former trader brought a lawsuit in front of a UK employment tribunal saying that he was unfairly terminated by Citi. He said that his conduct (sharing information in chat rooms with other FX traders, including sharing private info regarding client trades) was quite common at the time and that his managers were aware that he was on the chat rooms. In 2009 during an employment review he was told by his manager to join chat rooms to gather market information, but was not provided any guidelines on what he could post.

The tribunal found in his favor, although saying that he contributed to his dismissal. A hearing next year will determine the compensation that Citi is required to pay him.

This argument is not one that usually wins in a court ("officer, why did you stop me? Everyone else was speeding also). Although this verdict may help other former bank FX traders who are bringing suits, it does not impact anything else regarding the fixing scandals, such as guilt or fines and settlements with regulators.

FX Scandal Not Blowing Away

First of all, the rest of the world is looking at the US class action suit in which over $2 billion in settlements have already been made by 9 large banks, and lawyers and investors are planning additional suits in several countries. A $1 billion suit has just been filed in Canada relating to benchmark currency fixes.

Secondly, a Citi FX trader who had been dismissed in the UK relating to his sharing of client information with FX traders from other banks on chat rooms, is fighting his dismissal. He is claiming that it was a market practice at the time to share such information, especially regarding the trading of central banks. He mentions one M&A deal in which Citi front run the client's trade and made a profit of $35 million. He states that the very top Citi FX management actually had a hand in this deal.

There are other FX traders who were dismissed relating to similar charges who are also planning on disputing their firings.

FX Manipulation Class Action Spreads to more Banks in US, Possibly Around the World

It is now reported by Reuters that four additional banks, HSBC, Barclays, BNP Paribas and Goldman Sachs, have agreed to settle the US FX benchmark manipulation class action suit. In addition to bank settlements announced previously, this brings total settlements over $2 billion. Individual bank settlement amounts have not yet been announced. These banks plus five banks that settled previously have all agreed to "substantial cooperation" against the remaining 7 bank defendants, including recently added defendants (Bank of Tokyo-Mitsubishi UFJ, RBC Capital Markets, Société Générale and Standard Chartered were added August 1). Counsel referred to these settlements as "just the beginning" and mentioned that they are consulting on bringing additional cases against banks in larger Asian and European markets.

FX Manipulation Lawsuit Tsunami at Banks' Doorstep

First, about three weeks ago, JPMorgan settled an FX manipulation lawsuit for a reported $100 million. Now, Reuters reports that a judge allowed the investor plaintiffs' case to go forward to trial over the banks' objections. These included that there was a lack of evidence and that a prior LIBOR case alleging antitrust abuses was thrown out of court.

These two events alone should bring forth a barrage of suits as success seems more probable. In addition, now that this trial can go forward, the banks' position looks to be hurt by two factors.

First, depositions can now be taken, which may provide additional evidence of wrongdoing (several of the banks have already been fined by regulators following employee interviews). Second, a problem in suing to date has been attempting to prove wrongdoing and antitrust behavior. There is a lack of data on trades executed by banks on specific dates in specific currencies. Trade data released by banks during the discovery process may make the plaintiffs' calculation of any damages much easier, rather than relying upon models of what may have been manipulation based solely upon price movements.

While lawsuits from investors (money managers, pensions funds, etc.)and corporations are to be expected, many other groups impacted by currency rates can be expected as well. As an example,a few weeks ago we reported on British farmers that may have been affected by the conversion of subsidies from euro to British pounds.

Will the Banks be Hit by a Wave of FX Manipulation Lawsuits?

An article in yesterday's Telegraph reports that UK farmers were hurt by the FX benchmark rigging scandal, as there is a 2.6 billion pound EU subsidy that first has to be converted from euros before paid to British farmers. An unclear reference in the article cites one day's manipulation that cost the farmers 16 million pounds in one year.

Regardless of the details here, what struck us at FinancialPests, was the wide range of potential suits with which the banks could be hit. Beyond all of the financial players, who we would expect to be more likely to file suits now that JPMorgan has settled one US suit, there may be many others as well. UK farmers would not have been on our radar screen as potential litigants(although no suit was mentioned in the article). Europe is, of course, less litigious than the US, and slower to file suits, but this reinforced to us that potentially, there may be a landslide of suits filed around the world during 2015.

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.

Not Edgar Too! Do High Frequency Traders Have an Advantage?

Bloomberg reports that a study highlights another way that high frequency traders appear to be taking advantage of slower market players.  The SEC's EDGAR system receives companies' required  filings electronically.  There are some participants that pay to receive this service directly while most can access it for free online.

The study indicates that the documents are received between 0 seconds and up to one minute earlier by those who pay compared to when the documents are made available online to all others, 10 seconds earlier on average. The study also shows that in cases where the filing availability was made earlier to paying market participants, abnormal volume and price moves began on average 30 seconds before availability to the general public.  The study does not tie the early availability to these moves, stating that the cause is unknown.

While there are many reasons that some are concerned about high frequency traders making money at the expense of slower moving investors, this has not been heard of before by us.  While the article states that this is most likely unintentional, as high frequency traders did not exist when the system was initiated in the 1990s, it does seem to highlight another way that certain market players keep ahead of the regulators and the rest of the market.  Ironically the system replaced a much longer availability time discrepancy when reports were not available electronically at all.  The SEC has been reviewing the situation at least since June.

We will need to await the SEC's review to assess market impacts and the potential for a new set of "market rigging" lawsuits.

Settlements Approaching on FX Benchmark Rate Investigations

Reports are becoming more frequent that a settlement is in the works between the UK Financial Conduct Authority and money center banks regarding the FX benchmark pricing scandal.  These discussions are supposed to involve a total fine of about $3 billion (at the low end of expectations) and importantly, only charge the banks with maintaining insufficient compliance procedures to catch individual traders.  It is the traders who would be seen as the true purveyors of misconduct.

UBS today reported that it is in talks with an unnamed regulator that could result in material fines for not having sufficient controls to prevent misconduct of their employees.

There is a belief that the regulators of many countries are working multilaterly, even if not exactly together.  If they all pursue a line of reasoning as discussed above, this would indicate a much lighter hit for the banks.  The fines may be less than assumed, and importantly, the banks may not have to plead guilty to criminal behavior.  With settlement talks ongoing, some are now expecting settlements before year end.

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.

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.

One Estimate of FX Benchmark Fines for Banks - $35 Billion

Reuters discusses the research report issued this week by an independent research firm, Autonomous Research.  Led by a former minister in a Labor government and a former head of equity research at Merrill Lynch, the report attempts to determine the size of government fines around the world to be assessed upon money center banks for the FX benchmark rate manipulation scandal.

While they admit that they are speculating, they use the theory that repeated wrong-doing will attract much larger fines and thus use the total $6 billion in fines from LIBOR as a base.  Their assumption is that total fines among banks will be a minimum of $12B (but capped for individual banks at a level equal to annual profits) but could rise as high as $35B in total.  Individual bank fine estimates in the report are $8B for UBS, $4.4B for Deutsche and $4.3B for Citi.

While we find it difficult to comment on what the fines may ultimately total between all of the regulators involved, a number somewhat higher than twice LIBOR  may be more reasonable.  In addition, banks will most likely need to acknowledge wrongdoing, rather than being able to deny such as in the past.  Some of the reasons we tend toward lower estimates is that regulators will still be able to herald record fines and that the additional sources of fines and litigation costs screaming toward banks' balance sheets and earnings from other scandals (including mortgages, other market manipulations, US sanction/embargo evasion and numerous others) are already going to strain the ability of many banks to meet more stringent capital requirements going forward.  The answer will not be known most likely until sometime next year.

Something Funny Happened on the Way to Court

News about the alleged forex manipulation has sucked most of the media's attention and focus away from the Libor and ISDAfix scandals.  I just saw, however, this recent piece from Global Insurance Intelligence discussing the potential payouts on the ISDAfix scandals. The article suggests that the payouts for ISDAfix could dwarf the costs of Libor and forex but does not share any analysis as to how they got to that conclusion. I don't have a crystal ball telling me whether there will in fact be any payouts on ISDAfix and if so what they will be, but this is a welcome distraction of the steady drumbeat of news about forex traders at big banks being suspended or fired. 

FT: Deutsche Bank warns of material damage for forex probes

Defendants of lawsuits generally refrain from discussing potential damages lest they show their hand to the plaintiffs. But the Financial Times reports that Deutsche Bank has warned of material impact from the forex probes. Obviously Deutsche is taking a different tactic.

Credit Suisse Estimates US Fines and Other Litigation Costs of $104 Billion

FT Alphaville reports the doubling of Credit Suisse's estimate for US litigation costs from last year to this, from $58B to $104B.  Of this, only $69B has been reserved to date.  US regulators are looking for substantially higher penalties for misconduct on the part of banks than in the past, and many European banks are expected to be severely penalized for many actions. Credit Suisse breaks down its reserves into seven areas, as can be seen in the article.

The WSJ reports that litigation costs have been a part of US bank stress testing but have not been captured in European stress tests.  That is now changing as the European Central Bank and European Banking Authority are both concerned with the potential scope of the costs.  The EBA has asked individual countries to look at "conduct risk" as part of their stress testing.  The ECB takes over the role of European banking supervisor on November 4 from national regulators.  Based upon CS's litigation costs equaling about half of the losses from the financial crisis, the ECB will be kept quite busy in its new role.

Banks Seek Dismissal of FX Fix Rate Manipulation Class Action Lawsuit

Reuters reports that the 12 banks included in the WM Reuters manipulation class action suit are requesting that the case be dismissed.  This would seem to be a standard legal maneuver but we will need to wait to see the judge's ruling.

The banks state that no specific instances of manipulation are mentioned in the suit, nor is there any specific instance of harm brought forth in the suit.  The plaintiffs apparently are waiting for internal bank or regulatory investigations to provide them with some specifics.  The banks are hoping for dismissal before this occurs and to avoid the discovery process if the case is allowed to continue.

Deutsche Reported to Set Aside $2.7 Billion in FX Legal Costs and Fines

Last week Deutsche announced that in total, it is facing 1,000 lawsuits with potential payouts above 100,000 euros. We reported here last week that Bafin, the German regulator, announced that the FX benchmark probe was "much, much bigger" than the LIBOR case.  Now Reuters reports that sources tell it that Deutsche is setting aside $2.7 billion to cover future FX fines and settlements.

Put these together and, while it is not certain what has been found so far in the internal and various regulatory investigations, Deutsche clearly believes that there will be substantial costs going forward of at least that amount.  Of course, this does not necessarily mean that Deutsche believes that they are guilty as they may feel that they are meeting accounting/legal requirements in recognizing these costs at this time.  However, throw in several FX traders that Deutsche has suspended during its internal investigation, and it is difficult not to lean towards the view that where there is smoke there is fire.

London Silver Daily Fixing to End August 14 After 117 Years

Reuters reports that Deutsche Bank has postponed to August 14 its decision to drop out of the London Silver Market Fixing.  In January Deutsche reported that as part of its retreat from much of the commodity business, it was going to sell its' memberships in the gold and silver fixes, run by five and three banks, respectively. They have not been able to sell either so far and announced that they will drop out of the processes on August 14.  The London Silver Market Fixing Ltd. said that the fix will cease at that date.  The possibility of another firm taking over the fix with replacement bank(s)  remains a possibility, although this might be a difficult time to attract anyone to establish benchmark prices.  The CFTC ended an investigation into the silver fix in 2013 without finding any wrongdoing.

Many lawsuits regarding the gold fix are currently in the process of being consolidated by the courts.  There do not appear to be any lawsuits regarding the silver benchmark.

Legal Theories in LIBOR and FX Lawsuits

While this article in CapLaw discusses the history of the allegations, investigations and lawsuits in the FX and LIBOR scandals, we thought it most interesting to focus on the legal theories and their current status.

In LIBOR, the US consolidated case held that there was no antitrust damage as the LIBOR rate setting process was not competitive in nature and thus there could not be anti-competitive behavior.  However, "second-generation" lawsuits filed by plaintiffs claiming direct trading losses from derivatives with banks that provided benchmark LIBOR rates, are moving through the legal system.  Two large plaintiffs are the FDIC, on behalf of 38 failed banks, claiming fraud and collusion were used by the LIBOR setting banks to suppress rates, and Freddie Mac and Fannie Mae, claiming that LIBOR manipulations caused them to suffer losses on mortgages and financial derivatives.

LIBOR cases in the UK have been limited, with only two cases filed, one of which was settled and the other remains with the courts.

In the FX benchmarks, the US has consolidated numerous class action suits into one.  Differences between the rate setting process in FX vs. LIBOR make it unclear whether antitrust charges will hold up in the FX case.  Fraud and collusion charges remain in FX as well, but the later start of FX allegations, the complexity of the cases and the continuing regulatory and internal bank investigations, means that further clarity will not be forthcoming until at least late 2014.

Clients will Need to Pay for Trading at FX Benchmark Rates

We have said in previous posts that trading with a bank for a fix later in the day, without paying the bank for the service (most fix trades are executed at the midpoint, avoiding even the usual bid offer spread paid for an immediate trade), is the source of much of the trouble with fixes.  Clients wanted it and banks accepted it.

This article in FX Week (subscription) describes the problem that the banks have with these trades.  Trading before or during the fix can bring accusations of front running or manipulation, and trading after the fix risks incurring losses, which banks have been particularly unwilling to risk since the financial crisis.  Based upon the allegations in lawsuits and the regulatory and bank investigations underway, many suspect that some bank traders may have found ways to make profits on such trades anyway, including collusion among the banks.

For those who wish to continue fix trading, they may ultimately need to be willing to pay a bank to take on this risk or manage the risk around the fix themselves, either utilizing algorithms or traders with tight risk parameters.  Managing the risk by the firm involves staffing/trading costs as well as the cost of variances between realized rates and the fix.  At the moment there is no indication that banks are considering charging for fix trades, but with continuing compression in bank spreads on non-fix trades, eventually this may be part of the solution.

Barclays loses a LIBOR case at the 2nd Circuit

Reuters reports that the 2nd Circuit Court of Appeals reversed a SDNY court decision and allowed a shareholder suit against Barclays related to LIBOR manipulation to move forward. A copy of the decision can be seen here and the notice from plaintiff's counsel, Robbins Geller, can be accessed here. Will this case be appealed to SCOTUS?