The Serious Fraud Office, a British government fraud agency that investigates and prosecutes complex frauds, has announced that it is dropping the FX fix manipulation investigation. While several government agencies around the world investigated and settled with banks for over $10 billion in fines (with many banks pleading guilty to felony charges), the SFO announced that it is dropping its investigation (while continuing to liase with the US Justice dept in its investigation of FX fix manipulation). It said that there was insufficient evidence to realistically gain a conviction.
The lion share of FX trading occurs in the UK. We will have to wait and see the effect of this matter on the law suits that reportedly are being considered for filing in the UK, as well as on further regulatory investigations in the US and elsewhere.
Promotion of Ethics, Simplicity and Transparency in Finance
Showing posts with label regulator. Show all posts
Showing posts with label regulator. Show all posts
Wednesday, March 16, 2016
Wednesday, November 18, 2015
Upcoming FX Settlements for Barclays and Deutsche
While FX misconduct investigations began regarding attempts to rig daily spot fixes, it has broadened to additional areas. Now the Financial Times reports that Barclays is near a settlement of over $100 million with the New York Department of Financial Services (NYDFS) regarding the misuse of the last look feature on its FX trading platform, BARX. Last look gives a bank the ability to quickly back out of a trade if there is a significant spot move against them. Those trading on a last look platform would expect to see tighter spreads in exchange for the proper usage of the last look provision.
The FT also reports on several FX investigations into Deutsche. These include the NYSDFS looking into Deutsche's trading platform, Autobahn, a report that there is evidence the bank intentionally set up algorithms to rig the currency markets,and that NYDFS, the Justice Department and other federal agencies have evidence that the bank profited by front running client FX orders. The new CEO at Deutsche may be more willing to try to settle these FX, and other investigations of past misconduct, quickly so that they can concentrate on the changing banking environment.
The FT also reports on several FX investigations into Deutsche. These include the NYSDFS looking into Deutsche's trading platform, Autobahn, a report that there is evidence the bank intentionally set up algorithms to rig the currency markets,and that NYDFS, the Justice Department and other federal agencies have evidence that the bank profited by front running client FX orders. The new CEO at Deutsche may be more willing to try to settle these FX, and other investigations of past misconduct, quickly so that they can concentrate on the changing banking environment.
Thursday, June 11, 2015
Citi says FX Fines 2,500 Times the Illicit Profits
Bloomberg reports that "Jamie Forese, head of the Citigroup Inc. unit that houses trading and investment banking, said fines the firm paid for rigging foreign-exchange markets dwarfed the amount generated by the illegal conduct. Revenue from the trades amounted to about $1 million, while Citigroup paid out $2.5 billion in fines and penalties, Forese estimated Wednesday at an investor conference in New York."
Among commentators, and regulators as well, there has been a question regarding whether the size of fines in recent settlements have been painful enough to cause banks to prevent further occurrences of misconduct. Some suggest yes, many no, but without knowing the profits generated by misconduct, it is a difficult question to answer.
If this represents Citi's answer to the discussion, we suggest that it is incomplete. While the article does not mention how the 1 million dollar gain was calculated, perhaps it was strictly based upon the specific trades uncovered in the investigations, such as the trades highlighted in the CFTC - Citi settlement. However, the settlement states that "From 2009 through 2012 (“Relevant Period”), Citibank, by and through certain of its
foreign exchange (“FX”) traders, at times sought to benefit its own trading positions or those of certain FX traders at other banks by attempting to manipulate and aiding and abetting certain traders at other banks in their attempts to manipulate certain FX benchmark rates." So the plea is to misconduct at the fixes for 4 years.
In the DOJ settlement Citi pleads to having "entered into and engaged in a conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for, the EUR/USD currency pair exchanged in the FX Spot Market by agreeing to eliminate competition in the purchase and sale of the EUR/USD currency pair in the United States and elsewhere. The defendant, through one of its EUR/USD traders, participated in the conspiracy from at least as early as December 2007 and continuing until at least January 2013." Here the plea is to manipulating the EUR/USD pair for a period of 5 years, but not limited to only the fixing of benchmark rates.
If 5 years of misconduct in EUR/USD (DOJ) or 4 years in various currencies at benchmark fixes (CFTC) only lead to a 1 million dollar gain, it would lead one to question how Citi made about $2 billion in revenue per year in FX during this period. Thus we question not only if the fine was truly 2,500 times the size of the misbehavior, but whether such misbehavior was limited to about one-hundredth of one percent of FX revenues ($1 million / $10 billion).
Among commentators, and regulators as well, there has been a question regarding whether the size of fines in recent settlements have been painful enough to cause banks to prevent further occurrences of misconduct. Some suggest yes, many no, but without knowing the profits generated by misconduct, it is a difficult question to answer.
If this represents Citi's answer to the discussion, we suggest that it is incomplete. While the article does not mention how the 1 million dollar gain was calculated, perhaps it was strictly based upon the specific trades uncovered in the investigations, such as the trades highlighted in the CFTC - Citi settlement. However, the settlement states that "From 2009 through 2012 (“Relevant Period”), Citibank, by and through certain of its
foreign exchange (“FX”) traders, at times sought to benefit its own trading positions or those of certain FX traders at other banks by attempting to manipulate and aiding and abetting certain traders at other banks in their attempts to manipulate certain FX benchmark rates." So the plea is to misconduct at the fixes for 4 years.
In the DOJ settlement Citi pleads to having "entered into and engaged in a conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for, the EUR/USD currency pair exchanged in the FX Spot Market by agreeing to eliminate competition in the purchase and sale of the EUR/USD currency pair in the United States and elsewhere. The defendant, through one of its EUR/USD traders, participated in the conspiracy from at least as early as December 2007 and continuing until at least January 2013." Here the plea is to manipulating the EUR/USD pair for a period of 5 years, but not limited to only the fixing of benchmark rates.
If 5 years of misconduct in EUR/USD (DOJ) or 4 years in various currencies at benchmark fixes (CFTC) only lead to a 1 million dollar gain, it would lead one to question how Citi made about $2 billion in revenue per year in FX during this period. Thus we question not only if the fine was truly 2,500 times the size of the misbehavior, but whether such misbehavior was limited to about one-hundredth of one percent of FX revenues ($1 million / $10 billion).
Tuesday, October 21, 2014
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.
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.
Wednesday, October 8, 2014
Outline of FX Fix Reforms is Clearer
The recommendations of the Financial Stability Board last week regarding changes to the WM Reuters fix will be presented at the G20 meeting in November. These include extending the fix window (they support a move from from 1 minute to 5, but want the WM Reuters company to set the period), making prices transparent and appropriate for the risk borne (meaning that banks should be paid for fix trades, unlike past practice) and codes of conduct and internal guidelines should be more explicit.
While fully agreeing with all of the above, we see the two remaining major recommendation as problematic. First is the recommendation that "banks establish ... separate processes for handling such orders". Handling fix trades separately from other fx trades will be costly, probably causing some smaller players to eliminate their participation in the fix. An article from FX Week (subscription or free trial) refers to banks considering the possibility of creating sealed trading rooms, away from other fx traders and order flow. While it is unclear how seriously this is being looked at, such a possibility appears a bit absurd to us, as enforcing more explicit codes of conduct and internal guidelines as already suggested, should improve the outcome without the costs or need for quarantined traders.
The other problematic recommendation of the FSB is "the development of industry-led initiatives to create independent netting and execution facilities for transacting fix orders". While a longer term recommendation, this continues on the path of much higher cost and uncertain outcome. Just to mention one issue, commonsense dictates that the largest incentive for manipulating rates is when there is a large discrepancy between buy and sell orders for a currency pair. At such times, the only way to clear these separate trades is to trade with the rest of the market, the same traders that this recommendation is trying to avoid.
All in all, we approve of the recommendations as promoting that which Financial PESTs stands for - ethics, simplicity and transparency, albeit with the two exceptions discussed which require additional scrutiny before any implementation.
While fully agreeing with all of the above, we see the two remaining major recommendation as problematic. First is the recommendation that "banks establish ... separate processes for handling such orders". Handling fix trades separately from other fx trades will be costly, probably causing some smaller players to eliminate their participation in the fix. An article from FX Week (subscription or free trial) refers to banks considering the possibility of creating sealed trading rooms, away from other fx traders and order flow. While it is unclear how seriously this is being looked at, such a possibility appears a bit absurd to us, as enforcing more explicit codes of conduct and internal guidelines as already suggested, should improve the outcome without the costs or need for quarantined traders.
The other problematic recommendation of the FSB is "the development of industry-led initiatives to create independent netting and execution facilities for transacting fix orders". While a longer term recommendation, this continues on the path of much higher cost and uncertain outcome. Just to mention one issue, commonsense dictates that the largest incentive for manipulating rates is when there is a large discrepancy between buy and sell orders for a currency pair. At such times, the only way to clear these separate trades is to trade with the rest of the market, the same traders that this recommendation is trying to avoid.
All in all, we approve of the recommendations as promoting that which Financial PESTs stands for - ethics, simplicity and transparency, albeit with the two exceptions discussed which require additional scrutiny before any implementation.
Monday, September 22, 2014
No More Junk Banks !!
Now Available: Banking on Failure – Fixing the Fiasco of Junk Banks, Government Bailouts, and Fiat Money ! The authors propose simple but drastic changes to banking and bank regulation. Banking on Failure explains how banks will be safer and have far less impact on economies and governments if and when they do fail. No more bailouts!
I became fascinated with the challenge of “fixing banking” while spending a year as a lead investigator for the Bankruptcy Court to determine why Lehman Brothers failed in September 2008. With additional consulting experience and independent study, I believe Laurel and I have found a comprehensive and pragmatic solution. But it’s a big change!
Please see this link for the (short) Introduction. I paste the Table of Contents below. The Kindle E-Book version is best since it has more than 200 live links to news articles and other references that support our discussions.
Table of Contents:
1.
Introduction
2.
Business
Failure
3.
Banking
Business
4.
Banks
Versus Non-Banks
5.
Analysis
of Banking Risk
6.
History
of Banking
7.
History
of Money and Gold
8.
Central
Banks
9. Regulation
of Banks
10. Money,
Lending, and Inflation
11. Junk
Banks
12. Fixing
Banking
13. Summary
Saturday, September 20, 2014
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.
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.
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