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.

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.

UK Fraud Agency Drops FX Rigging Investigation

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.

ECB to Inhibit Trading Utilizing Daily EUR Reference Rates

The ECB publishes reference rates on 30 currencies at 2:30 PM each day, based upon spot rates at 2:15 PM. The ECB wants these to be used for reference or informational purposes only, not for trading. The ECB has not said whether or not it suspects rigging of these daily rates, as existed in the WM Reuters daily fixings. As of July 1, 2016 these rates will not be published until 4:00 PM, thus seemingly reducing their usefulness as a basis for trading or for that matter, for rate-rigging by any parties interested in such behavior. The ECB said this change is a reaction to recommendations by regulators reforming global FX benchmarks.

It has been our experience that these rates are used for trading, particularly by asset managers, although not to the degree to which WM Reuters rates are used. Any such traders after July 1 will have to either utilize other means to trade or wait much longer between when positions are provided and trade rates are known. This time is at a minimum an operational delay/complication, or worse, an additional operational risk.

FX Brokers Investigated by NYS AG for Spoofing

The New York State Attorney General is investigating FX brokers for spoofing on their electronic platforms. The investigation is looking into whether or not the brokers did this in FX options for emerging market (EM) currencies, to create the illusion of more trading and liquidity in order to increase customer demand for these instruments. FX options in EM currencies tend to be illiquid with a limited amount of trading.

Spoofing is the posting of orders to buy or sell with the intent of cancelling them without execution. While spoofing is frequently used as a means to lead a market in a particular direction, here it seems the concern is that brokers were trying to create the appearance of a more liquid, vibrant market in order to lure additional trades onto the brokers' FX EM options platforms. The AG is reported to have subpoenaed records from brokers including TFS-ICAP, Tullett Prebon, BGC Partners and GFI Group.

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.