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.

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.

EU Parliament Passes New Benchmark Rules

This week the EU Parliament addressed the benchmark rate rigging scandals that have plagued financial markets for the past several years, including LIBOR, FX, gold and oil. The goal is to “clean up the benchmark-setting process, improve transparency and prevent conflicts of interest.”

While not yet implemented, new rules will affect benchmarks while breaking them into three categories based upon the size of the instruments and/or contracts influenced (over Euro 500 billion, over 50 billion or below 50 billion). Administrators of benchmark rates will need to create structures to prevent conflicts of interest, will be subject to controls, will have to be authorized or registered, and will need to publish their methodology and procedures for calculating each benchmark. As well, quality standards will have to be put in place for the data used to set benchmarks.