Investigation into FX Rates

The regulatory investigations into FX rates have focused on the abuse of the WM/Reuters rates, and specifically the London 4pm fix, as well as the 1.15pm European Central Bank (ECB) fix. Both daily benchmark rates are determined by the median rate of transactions in a 60 second window either side of 4pm and 1.15pm respectively and are widely used as pricing benchmarks and spot rates for other currency transactions. The FCA and CFTC have found that traders at different banks shared confidential customer order information and trading positions, altered trading positions to accommodate banks’ collective interests, and agreed on trading strategies to attempt to manipulate certain FX benchmark rates. This included manipulating fix rates to trigger client ‘stop loss’ orders for the banks’ benefit; for example, where a bank sells currency to the client under the triggered stop loss order at a higher rate than it had been able to buy that currency, generating a profit for the bank (and potentially financial detriment for the client).

The banks failed to exercise proper control over their spot FX functions. Internal policies were high level in nature, oversight of spot FX traders’ conduct was insufficient and monitoring failed to identify traders’ conduct, including improper communications by traders and abuse of confidential client information. This allowed the banks’ spot FX businesses to act in the banks’ interests and without regard to the interests of market participants and clients.

In addition to its enforcement action, the FCA is undertaking an industry-wide remediation programme to review systems and controls, and internal policies and procedures, in the spot FX market and ensure they are equipped to manage risk appropriately. This is in conjunction with the FCA’s on-going broader review of how firms reduce the risk of traders manipulating benchmarks, ensure confidential information is protected, and manage conflicts of interest. The spot FX remediation exercise will extend in some cases to other FX sales, and derivatives and structured products referencing FX rates.

The adverse findings of the FCA and CFTC will provide useful material in support of civil claims against the banks in the English Courts.