Comments on the FCA Report on FX Wrongdoing

The FCA has announced its report on FX market misdoings and its associated punishments for wrongdoers.

The most important part, in my eyes, was the bit referring to 'triggering clients' stop losses'. This transgresses the original Fix fixing and opens up the biggest can of worms imaginable as to general FX practice. I would also suggest to the FCA that the wrongdoing doesn't stop at the banks' doors with many 'clients'  applying dubious practices. Many of them FCA regulated in one form or another.

I have written about how Regulation has killed the FX star before but here I would like to go through this report and make a few observations. Original in small italics, comments in normal text.

 The Financial Conduct Authority (FCA) has imposed fines totalling £1,114,918,000 ($1.7 billion) on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million) (‘the Banks’).


Why only five? As we will see the report goes on to identify generalised market malpractice.

The G10 spot FX market is a systemically important financial market. At the heart of today’s action is our finding that the failings at these Banks undermine confidence in the UK financial system and put its integrity at risk.

As much as the commodity, equity, bond, credit and all the other markets that haven't had this level of investigation aimed at them.

In relation to Barclays Bank Plc, we will progress our investigation into that firm which will cover its G10 spot FX trading business and also wider FX business areas.

Looks like the worst is saved 'til last. There's gonna be a lynchin'.

In addition to taking enforcement action against and investigating the six firms where we found the worst misconduct, we are launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. We will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed.

So others were up to it too but have escaped with a 'patch it up don't do it again'. The mention of root causes rightly implies that something isn't right with the way that institutions have had to do FX in order to survive.

This complements our ongoing supervisory work and the wider reforms to the fixed income, commodity and currency markets which are the subject of the UK Fair and Effective Markets Review.

Ah, FX isn't alone. In that case stand by for fines in other markets that will dwarf  these FX fines. Commodities, watch out.

Between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The Banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.

Bank's putting their interests above that of the client? Name one large company that doesn't. Companies are there to make money, not to be a social service. Fully agree that breaches of the other points should be punished.

These failings allowed traders at those Banks to behave unacceptably. They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G10 spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.

Yes. Caught bang to rights - Guilty

Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way. We have worked closely with other regulators in the UK, Europe and the US: today the Swiss regulator, FINMA, has disgorged CHF 134 million ($138 million) from UBS AG; and, in the US, the Commodity Futures Trading Commission (‘the CFTC’) has imposed a total financial penalty of over $1.4 billion on the Banks.

This paragraph smacks of 'haven't we done well, look at the large fine, we are heroes, don't say we aren't doing a good job in trying to shut the gate, even if the horse has bolted and been frolicking in the paddock in front of our eyes for years.

Since Libor general improvements have been made across the financial services industry, and some remedial action was taken by the Banks fined today. However, despite our well-publicised action in relation to Libor and the systemic importance of the G10 spot FX market, the Banks failed to take adequate action to address the underlying root causes of the failings in that business.

Once again the root causes. Perhaps they should examine what the FX market is and realise that bad market practices have evolved because it is an unregulated collection of market stalls rather than an exchange that does not charge commission (though at this rate it may have to).

Martin Wheatley, chief executive of the FCA, said:

“The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. Today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.

Not game the system to boost profits or imperil the wider UK financial system? The whole UK financial system and all its institutions are built on gaming the system and regulations.

But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre.”

 "London maintaining its position as a strong and competitive financial centre". Unfortunately one of the reasons most  these transgressions arose was due to the fiercely competitive element of London that you wish to preserve. Any future regulatory action must make sure that doing business in the future is not so onerous that companies head off to the Far East or lesser regulated market. The only answer is GLOBAL regulation.

Tracey McDermott, the FCA’s director of enforcement and financial crime, said:

“Firms could have been in no doubt, especially after Libor, that failing to take steps to tackle the consequences of a free for all culture on their trading floors was unacceptable. This is not about having armies of compliance staff ticking boxes. It is about firms understanding, and managing, the risks their conduct might pose to markets. Where problems are identified we expect firms to deal with those quickly, decisively and effectively and to make sure they apply the lessons across their business.  If they fail to do so they will continue to face significant regulatory and reputational costs.”

"This is not about having armies of compliance staff ticking boxes" That is exactly what it's about.

Clive Adamson, the FCA’s director of supervision, said:

“The supervisory measures that we are announcing today will help make sure that real cultural change is delivered across the industry, and that senior management take responsibility for ensuring that the highest standards of integrity operate across all of their trading businesses.”

Help, but in no way guarantee.

The FX Market 

The FX market is one of the largest and most liquid markets in the world with a daily average turnover of $5.3 trillion, 40% of which takes place in London. The spot FX market is a wholesale financial market and spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies.  Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk.

Fixes are not used to establish the relative value of two currencies. That is done by the dynamic market. A fix is an inaccurate out of date attempt at a snapshot of roughly where prices have been and  though it's applied to some trades, it is not actually a tradable price. Anyone who uses them as a way of  booking real trades needs to understand this. Unfortunately due to its application as a benchmarks in many funds, clients have more concern about deviation from the benchmark rather than the actual level of the price. This has naturally opened up behavioural imbalances.

'Turnover of $5.3 trillion, 40% of which takes place in London' The FCA should ask themselves why they had no clue until now about the basics of this market, or were they negligent in turning a blind eye?

The FCA’s investigation focused on the G10 currencies, which are the most widely-used and systemically important, and on the 4pm WM Reuters and 1:15pm European Central Bank fixes.

The FCA’s findings

Today’s action shows that we will not tolerate conduct that undermines the integrity of this crucial market or the wider UK financial system.

Once again, 'we are big and in charge'

We expect firms to identify, assess and manage appropriately the risks that their business poses to the markets in which they operate and to preserve market integrity, whether or not those markets are regulated. Although there are no specific rules governing the unregulated spot FX market, the importance of managing risks associated with spot FX business through effective systems and controls is widely recognised in industry codes.

As it remains an unregulated market translates to "Do your best, and if at some point we decide it wasn't good enough we'll fine you"

We found that between 1 January 2008 and 15 October 2013 the Banks did not exercise adequate and effective control over their G10 spot FX trading businesses. For example policies were high level and firm-wide in nature, there was insufficient training and guidance on how these policies applied to this business, oversight of G10 spot FX traders’ conduct was insufficient, and monitoring was not designed to identify the behaviours found in our investigation.

Yes, it is cultural and goes to the top.

The right values and culture were not sufficiently embedded in the Banks’ G10 spot FX businesses which resulted in those businesses acting in the Banks’ own interests without proper regard for the interests of their clients, other market participants or the wider UK financial system.


Traders at different Banks formed tight knit groups in which information was shared about client activity, including using code names to identify clients without naming them. These groups were described as, for example, “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team”.

Morons, in a Darwinian as well as regulatory way they deserve what has happened to them. One would hope that those indicted include management for lax controls as well as those directly involved

Traders shared the information obtained through these groups to help them work out their trading strategies. They then attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought that currency for in the market. If successful, the bank would profit.

Ok, this is where it gets interesting. 'and trigger client "stop loss" orders'. This moves away from the original Fix fixing realm and enters a whole new universe of possibility. If triggering client stop losses is punishable then every financial market should be quaking in its boots, with some of them having to put out profit warnings as revenue will collapse (Looking at you early monday Far East markets). From now on clients can expect dreadful slippage in any stop losses they put out there once they are triggered.
This topic is worth a post in its own right.

Firms can legitimately manage risk associated with client orders by trading in the market and may make a profit or loss as a result. It is completely unacceptable, however, 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 makes no sense. Can they or can't they trade against client orders? Where is the boundary between the first and second statement? Unfortunately 'manipulation' could be seen to occur with any proprietary trade as every trade effects price. There is no clear guidance as to how a 'profit' is separate from 'own benefit'. If the boundary is 'significant profit' as suggested in the last sentence then it implies that the issue is 'how much it is acceptable to profit from a client order' rather than if it is allowed at all.

In setting the fine for each Bank we have considered, amongst other things: the Bank’s relevant revenue, the seriousness of the breach, each Bank’s disciplinary record and response to the wider issues around Libor, the degree of co-operation shown by each Bank, and knowledge and/or involvement of certain of those responsible for managing this part of the Bank’s business.

We have also increased the penalty to reflect specifically the seriousness of the risks posed to a systemically important market and the failure across the industry to learn the necessary lessons about tackling these risks, given the similar failings which arose in the context of Libor.

The Banks agreed to settle at an early stage and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have amounted to £1,592,740,000 ($2.5 billion): Citibank N.A. £322,250,000 ($511 million), HSBC Bank Plc £309,090,000 ($490 million), JPMorgan Chase Bank N.A. £317,380,000 ($503 million), The Royal Bank of Scotland Plc £310,000,000 ($492 million) and UBS AG £334,020,000 ($530 million).

Our investigation lasted 13 months, involved over 70 enforcement staff and unprecedented cooperation with domestic and international regulators. We welcome the Serious Fraud Office’s criminal investigation into individuals.

the FCA are justifying the level of fines and trying to highlight that it was diligent. Though the fines are nothing compared to what the US would have nailed a European bank for, it's not a bad sum for 70 staff for a years work but  nothing like the amounts that the banks have made through this sort of practice over the lifetime of the London FX markets.

Tackling the root causes

It is clear from our findings that there has been widespread poor practice in the spot FX market. The FCA has sought to take swift enforcement action against the worst offenders, and has today announced it will carry out an industry-wide supervisory remediation programme for firms to drive up standards across the market.

Sounds a bit like a company selling the strength of its future order book. 'The FCA has orders for the next decade and will be expanding'.

The FCA is already conducting broader reviews of how effectively firms reduce the risk of traders manipulating benchmarks and ensure confidential information is not abused, and will also look at how firms manage conflicts of interest. We will use our findings to inform the remediation programme as appropriate.

Good, about time.

The remediation programme will require firms to review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of a sufficiently high standard to effectively manage the risks faced by the business. The work at each firm will depend on a number of factors, for example, the size of the firm and its market share and impact, the remedial work already undertaken, and the role the firm plays in the market.

Back to - "This is not about having armies of compliance staff ticking boxes" That is exactly what it is about.

In some cases, the reviews will extend beyond G10 spot FX, and we will require firms to explore any read across into FX Emerging Markets, FX Sales, derivatives and structured products referencing FX rates and precious metals.

Here we go, open the flood gates. May I suggest that, if the FCA wish to apply the same criteria they have used in this case to other areas, they take a look at market behaviour around option expiries, binary option triggers and extend it to the futures trading in all major markets beyond FX. Limitless possibilities.

And also PLEASE include the 'client' side. I am sure that the bad practice doesn't stop at the doors of the banks.

Senior management will be asked to attest that action has been taken and that firms’ systems and controls are adequate to manage these risks. This will ensure that there is clear accountability and senior management focus on the specific issues at each firm where the FCA expects to see change.

Removing even more incentive to ever being a senior manager in a bank. The smart ones, if they haven't already will have packed their bags for less onerous responsibilities leaving the mediocre and average to carry the can.

The FCA has played a key role in developing internationally agreed regulatory standards on benchmarks including work by the International Organisation of Securities Regulators (IOSCO) and Financial Stability Board.  We are actively engaged in developing EU regulation on benchmarks and co-chair the UK Fair and Effective Markets Review which is considering wider reforms to the fixed income, commodity and currency markets.

The FCA equivalent of 'Just call Saul'?