The foreign exchange market has been called ‘the world’s largest financial market where trillions are traded daily’. It is also a global financial market in which a variety of global financial institutions have reportedly colluded on foreign exchange rates for their personal advantage—sometimes even when that collusion may have resulted in disadvantage to their customers.
Since 2017, a number of leading financial institutions have been subject to substantial fines for cartel violations in the foreign exchange (forex) spot trading market. These included two 2019 settlements by five global banks (Barclays, RBS, Citigroup, JPMorgan, and MUFG) with the European Commission (EC) that entailed a total of €1.07 billion in penalties for participating in two cartels in foreign exchange spot trading.
On December 2, the EC concluded its cartel investigation into the forex spot trading market, by announcing that it had fined five global financial institutions—UBS, Barclays, RBS, HSBC and Credit Suisse—a total of €344 million for participating in a foreign exchange spot trading cartel.
The EC investigation had focused on the trading of the G10 currencies (ie, the Euro, British Pound, Japanese Yen, Swiss Franc, US, Canadian, New Zealand, and Australian Dollars, and Danish, Swedish and Norwegian Crowns), which it termed ‘the most liquid and traded currencies worldwide’. According to the EC,
some traders in charge of the Forex spot trading of G10 currencies, acting on behalf of the fined banks, exchanged sensitive information and trading plans, and occasionally coordinated their trading strategies through an online professional chatroom called Sterling Lads.
These information exchanges enabled the traders to make informed market decisions on whether and when to sell or buy the currencies they had in their portfolios, as opposed to a situation where traders acting independently from each other take an inherent risk in taking these decisions.
Occasionally, these information exchanges also allowed the traders to identify opportunities for coordination, for example through a practice called ‘standing down’, whereby some of them would temporarily refrain from trading to avoid interfering with another trader.
The EC explained in the latest settlement that it had imposed €261 million in penalties on four of the banks that decided to settle the case (ie, UBS, Barclays, RBS, and HSBC) and had penalized Credit Suisse an additional €83 million under the EC’s ordinary procedure in cartel investigations. Because UBS took advantage of the EC’s policy for leniency when a company reports the existence of a cartel, it received full immunity. The EC also gave four banks a 10 percent reduction in their fines, ‘in view of their acknowledgment of participation in the cartel and of their liability in this respect.’
The EC further noted that three of the banks had benefited from reductions to their fines for cooperating with the Commission's investigation. In its view, the reduction reflected both the timing of the banks’ cooperation ‘and the extent to which the evidence they provided helped the Commission to prove the existence of the cartel in which they were involved.’
Financial institutions, whether global, regional, or local, should take note of these three settlements with the EC and incorporate that information into their compliance training and internal controls. There can be no doubt, based on the information from the EC, that there was a signal failure of the cartel compliance function at each of the banks in question over multiple years. Other banks will need to examine the root causes of these failures to determine how best to improve their risk and compliance functions to avoid similar liability.
Jonathan J. Rusch is an Adjunct Professor of Law at the Washington and Lee University School of Law.