The Financial Conduct Authority (FCA) has imposed fines totalling £1,114,918,000 ($1.7 billion) on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million) (‘the Banks’).
The G10 spot FX market is a systemically important financial market. At the heart of today’s action is our finding that the failings at these Banks undermine confidence in the UK financial system and put its integrity at risk.
In relation to Barclays Bank Plc, we will progress our investigation into that firm which will cover its G10 spot FX trading business and also wider FX business areas.
In addition to taking enforcement action against and investigating the six firms where we found the worst misconduct, we are launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. We will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed.
This complements our ongoing supervisory work and the wider reforms to the fixed income, commodity and currency markets which are the subject of the UK Fair and Effective Markets Review.
Between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The Banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.
These failings allowed traders at those Banks to behave unacceptably. They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G10 spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.
Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way. We have worked closely with other regulators in the UK, Europe and the US: today the Swiss regulator, FINMA, has disgorged CHF 134 million ($138 million) from UBS AG; and, in the US, the Commodity Futures Trading Commission (‘the CFTC’) has imposed a total financial penalty of over $1.4 billion on the Banks and the Office of the Comptroller of the Currency (‘the OCC’) has imposed a total financial penalty of $700 million on Citibank N.A. and JPMorgan Chase Bank N.A.
Since Libor general improvements have been made across the financial services industry, and some remedial action was taken by the Banks fined today. However, despite our well-publicised action in relation to Libor and the systemic importance of the G10 spot FX market, the Banks failed to take adequate action to address the underlying root causes of the failings in that business.
Martin Wheatley, chief executive of the FCA, said:
“The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. Today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.
“But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre.”
Tracey McDermott, the FCA’s director of enforcement and financial crime, said:
“Firms could have been in no doubt, especially after Libor, that failing to take steps to tackle the consequences of a free for all culture on their trading floors was unacceptable. This is not about having armies of compliance staff ticking boxes. It is about firms understanding, and managing, the risks their conduct might pose to markets. Where problems are identified we expect firms to deal with those quickly, decisively and effectively and to make sure they apply the lessons across their business. If they fail to do so they will continue to face significant regulatory and reputational costs.”
Clive Adamson, the FCA’s director of supervision, said:
“The supervisory measures that we are announcing today will help make sure that real cultural change is delivered across the industry, and that senior management take responsibility for ensuring that the highest standards of integrity operate across all of their trading businesses.”
The FX Market
The FX market is one of the largest and most liquid markets in the world with a daily average turnover of $5.3 trillion, 40% of which takes place in London. The spot FX market is a wholesale financial market and spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies. Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk.
The FCA’s investigation focused on the G10 currencies, which are the most widely-used and systemically important, and on the 4pm WM Reuters and 1:15pm European Central Bank fixes.
The FCA’s findings
Today’s action shows that we will not tolerate conduct that undermines the integrity of this crucial market or the wider UK financial system.
We expect firms to identify, assess and manage appropriately the risks that their business poses to the markets in which they operate and to preserve market integrity, whether or not those markets are regulated. Although there are no specific rules governing the unregulated spot FX market, the importance of managing risks associated with spot FX business through effective systems and controls is widely recognised in industry codes.
We found that between 1 January 2008 and 15 October 2013 the Banks did not exercise adequate and effective control over their G10 spot FX trading businesses. For example policies were high level and firm-wide in nature, there was insufficient training and guidance on how these policies applied to this business, oversight of G10 spot FX traders’ conduct was insufficient, and monitoring was not designed to identify the behaviours found in our investigation.
The right values and culture were not sufficiently embedded in the Banks’ G10 spot FX businesses which resulted in those businesses acting in the Banks’ own interests without proper regard for the interests of their clients, other market participants or the wider UK financial system.
Traders at different Banks formed tight knit groups in which information was shared about client activity, including using code names to identify clients without naming them. These groups were described as, for example, “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team”.
Traders shared the information obtained through these groups to help them work out their trading strategies. They then attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought that currency for in the market. If successful, the bank would profit.
Firms can legitimately manage risk associated with client orders by trading in the market and may make a profit or loss as a result. It is completely unacceptable, however, for firms to engage in attempts at manipulation for their own benefit and to the potential detriment of certain clients and other market participants. Our Final Notices include examples where each Bank’s trading made a significant profit.
In setting the fine for each Bank we have considered, amongst other things: the Bank’s relevant revenue, the seriousness of the breach, each Bank’s disciplinary record and response to the wider issues around Libor, the degree of co-operation shown by each Bank, and knowledge and/or involvement of certain of those responsible for managing this part of the Bank’s business.
We have also increased the penalty to reflect specifically the seriousness of the risks posed to a systemically important market and the failure across the industry to learn the necessary lessons about tackling these risks, given the similar failings which arose in the context of Libor.
The Banks agreed to settle at an early stage and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have amounted to £1,592,740,000 ($2.5 billion): Citibank N.A. £322,250,000 ($511 million), HSBC Bank Plc £309,090,000 ($490 million), JPMorgan Chase Bank N.A. £317,380,000 ($503 million), The Royal Bank of Scotland Plc £310,000,000 ($492 million) and UBS AG £334,020,000 ($530 million).
Our investigation lasted 13 months, involved over 70 enforcement staff and unprecedented cooperation with domestic and international regulators. We welcome the Serious Fraud Office’s criminal investigation into individuals.
Tackling the root causes
It is clear from our findings that there has been widespread poor practice in the spot FX market. The FCA has sought to take swift enforcement action against the worst offenders, and has today announced it will carry out an industry-wide supervisory remediation programme for firms to drive up standards across the market.
The FCA is already conducting broader reviews of how effectively firms reduce the risk of traders manipulating benchmarks and ensure confidential information is not abused, and will also look at how firms manage conflicts of interest. We will use our findings to inform the remediation programme as appropriate.
The remediation programme will require firms to review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of a sufficiently high standard to effectively manage the risks faced by the business. The work at each firm will depend on a number of factors, for example, the size of the firm and its market share and impact, the remedial work already undertaken, and the role the firm plays in the market.
In some cases, the reviews will extend beyond G10 spot FX, and we will require firms to explore any read across into FX Emerging Markets, FX Sales, derivatives and structured products referencing FX rates and precious metals.
Senior management will be asked to attest that action has been taken and that firms’ systems and controls are adequate to manage these risks. This will ensure that there is clear accountability and senior management focus on the specific issues at each firm where the FCA expects to see change.
The FCA has played a key role in developing internationally agreed regulatory standards on benchmarks including work by the International Organisation of Securities Regulators (IOSCO) and Financial Stability Board. We are actively engaged in developing EU regulation on benchmarks and co-chair the UK Fair and Effective Markets Review which is considering wider reforms to the fixed income, commodity and currency markets.
Notes for Editors
1. The Final notices.
- Citibank N.A[1]
- HSBC Bank Plc[2]
- JPMorgan Chase Bank N.A.[3]
- The Royal Bank of Scotland Plc[4]
- UBS AG[5]
2. A summary of the FX market and example of attempted manipulation at each of the Banks.
- Citibank N.A[6].
- HSBC Bank Plc[7]
- JPMorgan Chase Bank N.A.[8]
- The Royal Bank of Scotland Plc[9]
- UBS AG[10]
3. Spot FX describes the exchange of two currencies (a currency pair), where the price (exchange rate) is agreed today and ownership is transferred shortly thereafter (usually two business days from the trade date).
4. The G10 currencies are US dollar, Euro, Japanese yen, British pound, Swiss franc, Australian dollar, New Zealand dollar, Canadian dollar, Norwegian krone and Swedish krona.
5. In April 2014, the FCA announced[11] it would review how effectively:
- Firms reduce the risk of traders manipulating benchmarks;
- Firms ensure confidential information they receive in one part of the business is not used by another business area in an abusive way; and
- Firms control conflicts of interest that can exist between obligations to clients and sales and the trading positions they take.
We are also reviewing firms’ compliance with new regulations on Libor, the London Interbank Offer Rate, which were introduced in April 2013 following a number of enforcement actions against firms for attempted manipulation of this key interest rate benchmark
6. The CFTC has imposed the following financial penalties: Citibank N.A. $310 million, HSBC Bank Plc $275 million, JPMorgan Chase Bank N.A. $310 million, The Royal Bank of Scotland Plc $290 million and UBS AG $290 million. The OCC has imposed the following financial penalties: Citibank N.A. $350 million and JPMorgan Chase Bank N.A. $350 million.
7. References in this press release, and in our Final Notices, to the Banks’ G10 spot FX trading business or operations or traders refer to its relevant voice trading desk based in London, or in the case of UBS only based in Zurich.
8. The 4pm WM Reuters fix[12] is calculated by reference to trading activity on a particular electronic broking platform during a one minute window (or “fix period”) 30 seconds before and 30 seconds after 4pm.
9. The ECB fix[13] is based on information exchanged between different central banks each day. This kind of fix is described as a “flash” fix – a fix that reflects an exchange rate at that particular moment in time.
10. Clients place stop loss orders to limit the amount they can lose on a particular position if the market rate moves unfavourably.
11. Examples of relevant industry codes include the Non-Investment Products Code and the ACI Model Code[14].
12. The FCA co-chaired work by International Organisation of Securities Regulators[15] to develop regulatory standards for all benchmarks in 2013 and review how effectively these standards have been applied[16] to key benchmarks in 2014. We have also co-chaired the Financial Stability Board[17] (FSB) work on reforms to interest rate benchmarks, following the introduction of our regulations on Libor.
The Fair and Effective Markets Review (FEMR) was established by the Chancellor in June 2014, to conduct a comprehensive and forward-looking assessment of the way wholesale financial markets operate. HM Treasury is considering FEMR’s recommendation[18] that the 4pm WM Reuters fix and six other key benchmarks should be formally regulated.
13. On 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
14. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
15. Find out more information about the FCA.