Major Banks Under Investigation for FX Manipulation

As regulators across the world have launched preliminary investigations against many of the world’s largest banks for foreign exchange collusion and manipulation, the Haverhill Retirement System has also filed a class action suit against these banks.

For the class action case, filed in New York Federal Court, the Haverhill Retirement System (the pension plan for city employees in Haverhill, Massachusetts) is suing on behalf of itself and similarly affected parties against Barclays, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan Chase, Royal Bank of Scotland and UBS. The complaint alleges that the banks have used the information from client FX orders to place trades for the banks’ proprietary benefit. “As alleged herein, Defendants have been trading ahead of client orders and rigging WM/Reuters rates (the benchmark rates for FX transactions) by pushing through trades before and during the 60-second windows when the benchmarks are set. By concentrating order in the moments before and after the 60-second window, traders colluded to push the rate up or down,” says the court document.

All of these banks except Credit Suisse have confirmed in company filings that they are also being investigated by regulators, and Goldman Sachs also confirmed that it is dealing with federal investigations. The regulators include the U.S. Department of Justice and the Commodities Futures Trading Commission (CFTC), EU antitrust regulators, the U.K. Financial Conduct Authority (FCA), the Swiss Financial Market Supervisory Authority (FINMA), the Hong Kong Monetary Authority and the Singapore Monetary Authority.

“There is smoke, so I think people are somewhat rightly assuming there’s a fire,” says Javier Paz, senior analyst at the Aite Group. “But it might not be as widespread as thought… right now I’m of the view that until the facts come out, we need to maintain an open mind.”

Paz points out that custodian banks such as BNY Mellon have been sued several times over the past few years for FX manipulation, but those cases have not gone very far, as many have been dismissed or settled for a relatively small amount. Plus, many of those state funds, such as in Florida, ended up reappointing BNY Mellon as their custodian after the lawsuits.

“I think the best chance the government has or multiple governments have [at winning] is to approach it from a collusion angle and basically common sense that when you act in in a monopolistic or oligarchical way (because the FX market is concentrated within the top firms), it’s possible for them—even with two or three firms—to move the market,” says Paz.

However, there could be a problem in proving the case because of the lack of regulation in the OTC markets that FX operates in. Plus, client contracts tend to give banks a lot of flexibility in how they handle FX. “Essentially I think it’s not a clear cut of wrongdoing because, again, there’s a lot leeway,” says Paz. “The question would be what exactly did they contractually agree to with their clients,” he adds.

Since these cases will be hard to prove and lengthy, and banks would rather spend time and costs on operations rather than in court, Paz predicts there will be settlements, perhaps in the ballpark of $1 billion per firm.
Paz also notes that there may be difficulty finding a regulator to take the lead in these investigations. While he thinks CFTC chairman Gary Gensler would have been the type to pursue this case aggressively, Gensler is stepping down at the end of the year, and “there’s no counterpart like him.”

Still, “I think just the threat of spot FX regulation is sufficient to make banks fall into line and improve their governance when it relates to communication across certain sensitive areas,” says Paz.