Damned spot trading
The $3.4 billion regulatory settlement for currency market rigging is a big wake-up call to the banking industry on self-policing. The firms involved – Citigroup, HSBC, JPMorgan, Royal Bank of Scotland and UBS – are paying 20 percent more than the same authorities have levied from five firms for the Libor scandal. That cannot be dismissed as simple fine inflation. It reflects banks’ failure to learn their lesson. Misdeeds in FX went on as recently as October 2013 – well over a year after Barclays became the first bank to settle over Libor.
Traders at the firms behaved unacceptably in a variety of ways: sharing client identities with each other, disclosing details of transactions to help each other’s firms manage their own FX positions, attempting to manipulate spot FX currency rates in a way that could disadvantage clients and the wider market.
The lack of precision in FX market rules and regulations encouraged this misbehaviour. Banks were allowed to share information about their customers’ orders to help them match trades and reduce volatility. A Bank of England official told a market participant he was “uncomfortable” with the practice given its potential to spark collusion, but did not escalate his concerns.
What is remarkable is that the FX quintet had initially woken up to the need to strengthen systems in the wake of the Libor scandal, but instantly pressed the snooze button. Each initiated reviews of other businesses and benchmark-setting practices, yet each glossed over FX trading. UBS failed to follow up properly on five instances of concern being raised internally, two of which came in late 2012.
Regulators now need to set clearer FX rules. Swiss regulator FINMA is trying to micromanage the situation, by forcing UBS to cap bonuses for its FX and precious metals staff at twice annual salaries, and for at least 95 percent of currency trading to be automated. But the reality is that banks need to police themselves more rigorously.
The UK Financial Conduct Authority is launching a “remediation” programme that puts the onus on senior management to clean up their firms. That captures the true scale of the problem – this is not about the FX business, but about bad incentives and a still-broken banking culture.