Currency trading, a rigged casino

In the past six months, seven global banks have been penalised $10.3 billion for price fixing, bid rigging, and jointly manipulating perhaps the largest financial market in the world. And more penalties are on the way.

Trading in currencies averages $5 trillion per day around the world, but is concentrated principally in New York and London. Until about 2006, collusion had never been observed in these Foreign Exchange (FX) markets, because of the minute-by-minute transparency of hundreds of FX rates, the many banks involved, and the thin margins earned by traders.

Consequently, government supervision was nearly absent; instead, publishers and the bank industry itself supervised the reporting of daily benchmark rates.

FX trading is an important source of revenues for global banks. Such revenues amounted to $12 to $22 billion annually for the ten largest banks during 2008-2014.

Because five or six large banks came to control more than half of all the world’s FX trading (and much higher shares of particular pairs of currencies), collusion became feasible.

These competition infringements were very injurious. We know from Citicorp’s signed guilty plea agreement that it alone made provable monopoly profits of at least $412 million.

Given Citicorp’s share of the FX market, total collusive profits going to the owners of big banks conservatively exceed $1.2 billion. That is, users of FX markets are at least $1.2 billion poorer because of the FX cartel.

We now know that a small number of traders at very large banks are guilty of manipulation on FX benchmark rates by accumulating large positions — far above what was required for lowering their clients’ currency risk needs. They then colluded with other traders through real-time messaging in online chat rooms during the one minute when FX rates are fixed.

By moving these rates a fraction of a percentage, teams of traders could make exorbitant profits on the vast pools of foreign currencies their bank controlled.

The more profits the traders made, the higher their year-end bonuses and the greater the injuries to their clients.

In early 2013, the large Swiss bank UBS AG sought antitrust leniency from the US, UK, and other competition authorities for its illegal FX schemes. In June 2013, the UK’s new Financial Conduct Authority opened a formal investigation, followed later that year by Swiss, EU, German, and the US government agencies.

In most of those jurisdictions, criminal probes are open. After internal investigations by leading banks, by February 2014 some 21 of their FX traders and supervisors had been fired (it is now more than 30). It seems very likely that large numbers of FX traders and their supervisors will be criminally charged for fraud and antitrust violations.

These investigations moved very fast, given the complexities of international cooperation among the prosecutors. On November 12, 2014, government regulators in the US, UK, and Switzerland simultaneously announced the imposition of 11 civil penalties totalling $4.33 billion on six banks: Citicorp, JPMorgan, Bank of America, UBS, RBS and HBSC. (Seven other banks mentioned as additional targets were left unscathed). The collusion endured from 2007 to 2013.

We now know that Barclays Bank refused to accept civil penalties last year, a decision it must now regret. Behind the scenes, the same banks were negotiating furiously with the US Department of Justice (DoJ) over whether to agree to plead guilty to the felony crime of price-fixing conspiracy and accept huge fines, as well as additional civil penalties from other market regulators.

On May 20, 2015, the DoJ and four other government units announced a second wave of harsher penalties on most of the same six banks (HSBC was spared, but Barclays added).

This time, penalties amounted to $5.97 billion. Five of the six banks will plead criminally guilty, including Citicorp, which must pay a $925 million US fine, by far the largest fine in world antitrust history. For the first time, the US central bank (the Federal Reserve Bank) imposed six civil penalties that totalled $1.85 billion for the banks’ “unsafe and unsound practices” in FX trading.

The UK’s FCA also imposed its largest fine ever — on Barclays Bank. Indeed, Barclays becomes the world record-holder in terms of total price-fixing penalties. It now owes $2.38 billion to the US and UK regulators.

The perpetrators of the FX cartel face a certain future of unrelenting demands for ever greater penalties. The German financial regulator (Bafin), the South African Competition Commission, and the European Commission (EC) have not yet completed their investigations of FX market manipulation.

The EC has a history of imposing antitrust fines that are well above the US fines for the same cartel violations. Because DoJ fines were $2.8 billion and total US fines exceeded $9.7 billion, the EU’s forthcoming fines may well fall into the $3 to $5 billion range.

In addition, settlements of the banks with civil damages suits filed in the US typically exceed criminal fines by a large margin. Settlements by private parties will very likely top $4 billion.

In sum, monetary penalties for FX market manipulation could easily surpass $15 to $20 billion in a few years. Is this shockingly large figure likely to deter future violations of competition laws by big banks?

Sadly, the history of the banking and finance industries offers no solace. The ethical culture of big banks is bent. A recent, confidential survey by Notre Dame University of 1200 employees of financial services professionals found that one-third of the highest-paid respondents reported witnessing illegal activity in their businesses.

Big banks in many nations have cartelised at least 65 markets in the past 20 years, and the number of such markets has accelerated in the past five years. So far, the $31 billion in antitrust penalties has failed to quash cartel formation in the banking sector.

Either the lure of excessive profits is too large, or the chances of being caught and severely punished are too remote in banking.

The writer is Professor Emeritus at Purdue University, West Lafayette, Indiana, USA

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