The Foreign Exchange Scandal….Your Legal Questions Answered
Our leading commercial litigation expert at Saracens Solicitors, Nishtar Saleem answers all your legal questions about November’s high profile foreign exchange scandal; the latest crisis to hit the banking world.
What Did This Latest Scandal Involve?
In the last few days, six banks (HSBC, Royal Bank of Scotland, UBS, JP Morgan Chase, Citibank and Bank of America) were fined £2.6 billion collectively by the UK Financial Conduct Authority and two American regulators after a 13 month investigation into the rigging of the foreign exchange (forex) market.
Over 30 traders have resigned, been fired or suspended from their positions within the six named banks since the investigation began.
Barclays is still holding discussions with its regulators, but has set aside £500 million to cover any possible fines.
What Is The Forex Market?
The Forex market is the largest trading market in the world, turning over an average of $US5.3 trillion per day. Over 40% of Forex trading comes through the City of London. In a nutshell, forex trading is buying one currency while selling another, speculating as to whether the values will rise or fall due to economic and political factors in different countries varying throughout the day.
The Forex Market has no physical location or trading floors and there are no tangible items changing hands in the trading. Instead, it is a virtual market, running 24 hours a day.
At 4pm every day in London, a foreign exchange rate benchmark is set. This is known as the ‘fix’. The fix is calculated based on the forex trading performance during the immediate period 30 seconds before and 30 seconds after 4pm London time.
How Did The Traders Rig The Forex Market?
Using internet chatrooms to communicate, under aliases such as ‘The A-team’, a small number of traders from the various banks collaborated to manipulate the daily fix by sharing information regarding pending client transactions and then aggressively buying and selling currencies during the 30 seconds before and after 4pm London time (known as ‘Banging the Close’) simultaneously. This resulted in trades large enough to directly affect the currency prices at this key time.
All the traders had to do to pocket a nice healthy profit in the few minutes before and after the fix, was to buy particular currencies as they knew it would rise in price due to the colluding traders’ buying or selling that particular currency all at the same time.
Was Their Behaviour Illegal?
The process outlined above is known as ‘front running’ which is illegal in stock markets around the world but not in foreign exchange trading. The reason front running has never been regulated in the forex market is that this particular market has always been deemed too big for any one trader to make a profit as it was thought that no single trade could manipulate the fix rate to any significant degree.
The traders who worked together simply found a loophole in the theory that the forex market was too enormous to make a profit via front running trades by realising that if they colluded together, and bought and sold particular currency concurrently, they could manipulate certain currencies’ ‘fixed’ exchange rate and make a few hundred thousand pounds for themselves in the process.
Although front running is not illegal within the forex market, traders colluding together to manipulate the market for their own benefit at the expense of their clients and the general public most certainly is.
So Who Loses Out If The Fix Rate Is Manipulated In Such A Way?
The bank’s own clients first and foremost! Artificial fixes can mean a multi-national company trading a foreign currency could end up buying or selling that particular currency at a far higher or lower rate than they would have done if the fix had not been manipulated. This can amount to millions of pounds worth of losses, depending on the size of the transaction in question.
What Will Happen Now That The Fines Have Been Issued?
At present, the beginning of the litigation aftermath of this scandal looks to be heading in two directions:
- The banks themselves are looking into how to claw back millions of pounds worth of bonuses from the colluding traders; and
- Customers who were affected and lost money due to the rigging are seeking compensation from the banks involved.
As yet there has been no move to prosecute the individual traders; However, this may happen in due course.
There have been calls from multiple sectors of society for the forex market to be more closely regulated and for the banks themselves to review and change the ‘less attractive’ aspects of their current employee and senior management culture, whatever that is supposed to mean!
Why Have Claims From Customers Only Started Now…Hasn’t This Been Going On For Years?
Yes it has, and many law firms have been talking with clients over the last 24 months, advising and gathering further information in preparation for the ruling by the various regulators. Now that the ruling has been made and fines have been issued, it is likely that the first cases will come before the courts within the next six months.
The banks are liable for their employees’ actions. The Financial Conduct Authority declared that:
“It is completely unacceptable for firms to engage in attempts at manipulation for their own benefit and to the potential detriment of certain clients and other market participants. Our final notices include examples where each bank’s trading made a significant profit.”
This statement, along with the evidence of collusion between traders through various chatrooms and online messaging, will provide significant ammunition for solicitors acting for claimants seeking to recoup the losses they suffered.
Will The Damages Awarded Be Substantial?
Early indications suggest yes; this banking scandal is likely to result in very large compensation payouts to affected customers. This is because it is relatively easy for claimants to prove that they lost money on the exchange, and the traders helpfully left online transcripts in which they often boasted about fixing the market as evidence.
If I Wish To Take Legal Action Against One Of The Banks, What Should I Do Next?
Get in touch with a commercial litigation solicitor who has a solid background in banking and finance law as soon as possible. You can also read more about issues which involve the Financial Conduct Authority here.
Do you have any comments to make on this latest scandal to hit the banking sector?
We welcome reader’s views; please feel free to comment below.
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