Forex Scandal
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The forex scandal (also known as the forex probe) is a 2013 financial scandal that involves the revelation, and subsequent investigation, that banks
colluded Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...
for at least a decade to manipulate
exchange rates In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...
on the
forex The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
market for their own financial gain. Market regulators in Asia, Switzerland, the United Kingdom, and the United States began to investigate the $4.7 trillion per day
foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
(forex) after
Bloomberg News Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg Televi ...
reported in June 2013 that currency dealers said they had been front-running client orders and rigging the foreign exchange benchmark WM/Reuters rates by colluding with counterparts and pushing through trades before and during the 60-second windows when the benchmark rates are set. The behavior occurred daily in the spot foreign-exchange market and went on for at least a decade according to currency traders.


Background

The
foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
(forex) has been largely unregulated, because regulators considered it "too big to be manipulated".


Investigation

At the center of the investigation were the transcripts of electronic
chatroom The term chat room, or chatroom (and sometimes group chat; abbreviated as GC), is primarily used to describe any form of synchronous conferencing, occasionally even asynchronous conferencing. The term can thus mean any technology, ranging from r ...
s in which senior currency traders discussed with their competitors at other banks the types and volume of the trades they planned to place. The chatrooms had names such as "The Cartel", "The Bandits’ Club", "One Team, One Dream" and "The Mafia". The discussions in the chatrooms were interspersed with jokes about manipulating the
forex The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
market and repeated references to alcohol, drugs, and women. Regulators were particularly focusing in on one small exclusive chatroom which was variously called The Cartel or The Mafia. The chatroom was used by some of the most influential traders in
London London is the capital and largest city of England and the United Kingdom, with a population of just under 9 million. It stands on the River Thames in south-east England at the head of a estuary down to the North Sea, and has been a majo ...
and membership in the chatroom was highly sought after. Among The Cartel's members were Richard Usher, a former Royal Bank of Scotland (RBS) senior trader who went to
JPMorgan JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the w ...
as head of spot foreign exchange trading in 2010, Rohan Ramchandani,
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
’s head of European spot trading, Matt Gardiner, who joined
Standard Chartered Standard Chartered plc is a multinational bank with operations in consumer, corporate and institutional banking, and treasury services. Despite being headquartered in the United Kingdom, it does not conduct retail banking in the UK, and around 9 ...
after working at
UBS UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...
and
Barclays Barclays () is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services. Barclays traces ...
, and Chris Ashton, head of voice spot trading at Barclays. Two of these senior traders, Richard Usher and Rohan Ramchandani, were members of the 13-member
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
Joint Standing Committee's chief dealers group. At least 15 banks including Barclays,
HSBC HSBC Holdings plc is a British multinational universal bank and financial services holding company. It is the largest bank in Europe by total assets ahead of BNP Paribas, with US$2.953 trillion as of December 2021. In 2021, HSBC had $10.8 tri ...
, and
Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...
disclosed investigations by regulators. Barclays, Citigroup, and JPMorgan Chase all suspended or placed on leave senior currency traders.
Deutsche Bank Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Sto ...
, continental Europe’s largest lender, was also cooperating with requests for information from regulators. Barclays, Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, RBS, Standard Chartered, UBS and the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
as of June 2014 had suspended, placed on leave, or fired some 40 forex employees. Citigroup had also fired its head of European spot foreign exchange trading, Rohan Ramchandani. ''
Reuters Reuters ( ) is a news agency owned by Thomson Reuters Corporation. It employs around 2,500 journalists and 600 photojournalists in about 200 locations worldwide. Reuters is one of the largest news agencies in the world. The agency was estab ...
'' reported hundreds of traders around the world could be implicated in the scandal.


Effects

As of December 2014, the monetary losses caused by manipulation of the forex market were estimated to represent $11.5 billion per year for Britain’s 20.7 million pension holders alone (£7.5B/year). The manipulations affected customers all around the world, for over a decade. The manipulations' overall estimated cost is not yet fully known.


Fines

On 12 November 2014, the United Kingdom's Financial Conduct Authority (FCA) imposed fines totaling $1.7 billion on five banks for failing to control business practices in their G10 spot foreign exchange trading operations, specifically: Citibank $358 million, HSBC $343 million, JPMorgan $352 million, RBS $344 million and UBS $371 million. The FCA determined that between 1 January 2008 and 15 October 2013 the five banks failed to manage risks around
client confidentiality Client confidentiality is the principle that an institution or individual should not reveal information about their clients to a third party without the consent of the client or a clear legal reason. This concept, sometimes referred to as social s ...
,
conflict of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations i ...
, and trading conduct. The banks used confidential customer order information to collude with other banks to manipulate the G10 foreign exchange currency rates and profit illegally at the expense of their customers and the market. On the same day the United States Commodity Futures Trading Commission (CFTC) in coordination with the FCA imposed collective fines of $1.4 billion against the same five banks for attempted manipulation of, and for aiding and abetting other banks’ attempts to manipulate, global foreign exchange benchmark rates to benefit the positions of certain traders. The CFTC specifically fined: $310 million each for Citibank and JPMorgan, $290 million each for RBS and UBS, and $275 million for HSBC. The CFTC found that currency traders at the five banks coordinated their trading with traders at other banks in order to manipulate the foreign exchange benchmark rates, including the 16:00 WM/Reuters rates. Currency traders at the banks used private chatrooms to communicate and plan their attempts to manipulate the foreign exchange benchmark rates. In these chatrooms, traders at the banks disclosed confidential customer order information and trading positions, changed trading positions to accommodate the interests of the collective group, and agreed on
trading strategies In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistenc ...
as part of an effort by the group to manipulate different foreign exchange benchmark rates. These chatrooms were often exclusive and invitation only. On 20 May 2015, the five banks pleaded guilty to felony charges by the
United States Department of Justice The United States Department of Justice (DOJ), also known as the Justice Department, is a federal executive department of the United States government tasked with the enforcement of federal law and administration of justice in the United State ...
and agreed to pay fines totaling more than $5.7 billion. Four of the banks, including Barclays, Citigroup, JP Morgan, and Royal Bank of Scotland pleaded guilty to manipulation of the foreign markets; while the others had already been fined in settlements from the November 2014 investigation, Barclays had not been involved and was fined $2.4 billion. UBS also pleaded guilty to committing
wire fraud Mail fraud and wire fraud are terms used in the United States to describe the use of a physical or electronic mail system to fraud, defraud another, and are Federal crime in the United States, federal crimes there. Jurisdiction is claimed by the ...
and agreed to a $203 million fine. A sixth bank,
Bank of America The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank w ...
, while not found guilty, agreed to a fine of $204 million for unsafe practices in foreign markets. On 18 November 2015 Barclays was fined an additional $150m for automated electronic foreign exchange misconduct.


Criminal proceedings

On 19 December 2014 the first and only known arrest was made in relation to the scandal. The arrest of a former RBS trader took place in
Billericay Billericay ( ) is a town and civil parish in the Borough of Basildon, Essex, England. It lies within the London Basin and constitutes a commuter town east of Central London. The town has three secondary schools and a variety of open spaces. It is ...
,
Essex Essex () is a county in the East of England. One of the home counties, it borders Suffolk and Cambridgeshire to the north, the North Sea to the east, Hertfordshire to the west, Kent across the estuary of the River Thames to the south, and G ...
, and was conducted by the
City of London Police The City of London Police is the territorial police force responsible for law enforcement within the City of London, including the Middle and Inner Temples. The force responsible for law enforcement within the remainder of the London region, ou ...
and the Serious Fraud Office. Several traders have been incarcerated for
market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
in recent years. The longest conviction was that of Tom Hayes; Hayes, a British citizen and ex-
UBS UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...
trader, received a 14-year sentence in 2015.


Reforms

As of November 2014, respective authorities announced remediation programmes aimed at repairing trust in their banking systems and the wider foreign exchange market place. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, the FCA has stated that the changes to be made at each firm will depend on a number of factors, including the size of the firm, its market share, impact, remedial work already undertaken, and the role the firm plays in the market. The remediation programme was to require firms to review their IT systems in relation to their spot FX business, as the banks relied on legacy technologies that allow for the existence of dark-data silos within which manipulation is able to occur unnoticed by compliance systems. In Switzerland, the
Swiss Financial Market Supervisory Authority The Swiss Financial Market Supervisory Authority (FINMA) is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers, as well as other ...
announced in December 2014, that for a period of two years UBS would be limited to a maximum annual variable compensation to 200% of the basic salary for foreign exchange and precious metals employees globally. UBS was instructed to automate at least 95% of its global foreign exchange trading, while effective measures must be taken to manage conflicts of interest with a particular focus on organisational separation of client and proprietary trading. As of May 2015, the window in which the daily 4pm fix is calculated was extended to five minutes as recommended by the Financial Stability Board, a watchdog advising the G20 finance ministers and the
Bank for International Settlements The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work thr ...
tried to get banks to agree a unified code of conduct.


See also

*
Fideres Fideres Partners LLP (Fideres) is an international economic consulting firm that specializes in investigating corporate and financial wrongdoing. It provides economic analysis to competition regulators, law firms and their clients, from prelimina ...
* Libor scandal, 2012 *
White-collar crime The term "white-collar crime" refers to financially motivated, nonviolent or non-directly violent crime committed by individuals, businesses and government professionals. It was first defined by the sociologist Edwin Sutherland in 1939 as "a ...


References


External links

;Bank of America * * ;Barclays * * * * * ;Citigroup * * * * * ;HSBC * * ;JPMorgan * * * * * . ;RBS * * * * ;UBS * . * * * * ;Government * . {{2008 economic crisis 2015 scandals Financial scandals Foreign exchange market History of banking