Filling the regulatory void in the FX spot market: how traders rigged the biggest market in the world.

Author:Powers, Colleen
Position:Forex market - II. Current Regulatory Scheme of the FX Market C. Other U.S. Regulators through Conclusion, with footnotes, p. 167-193
  1. Other U.S. Regulators

    1. Monetary Authorities

      The monetary authorities for the United States are the Department of the Treasury and the Federal Reserve. The Department of the Treasury is mandated with setting U.S. exchange rate policy since the breakdown of the Bretton Woods system in 1971 and with setting international financial policy. Practically, it is the Federal Reserve Bank of New York that implements the Department of Treasury's exchange rate policies, and thus these decisions are often made in consultation with the Federal Reserve. (183) The U.S. Federal Reserve and the U.S. Treasury Department also pay close attention to FX markets and look for evidence of manipulation. (184)

      In connection to their roles in manipulating the foreign exchange rates, on May 20, 2015, the Federal Reserve imposed $1.8 billion in fines collectively against six banks (185) in conjunction with the Department of Justice for "unsafe and unsound practices in the foreign exchange markets." (186) Along with the fines, the Federal Reserve issued cease and desist orders requiring each bank to improve their policies and oversight in the wholesale FX market. (187) The Federal Reserve required the banks "to improve senior management oversight, internal controls, risk management, internal audit policies, trading activities and procedures," and prohibits the reemployment of individuals involved in the manipulation scheme. (188)

    2. U.S. Office of the Comptroller of the Currency

      On November 12, 2014, the U.S. Office of the Comptroller of the Currency (OCC) announced it would impose a total $950 million fine on three banks: Citibank, JPMorgan Chase, and Bank of America (189) for their role in unsound practices in the FX market. (190) The OCC found the banks lacked sufficient internal controls and failed to detect traders' improper business. After their investigation, the OCC determined:

      [T]he traders disclosed confidential bank information, including customer orders and rate spreads. The OCC's examinations also found that traders discussed activity to trigger trading actions potentially detrimental to customers and beneficial to the trader or bank, and discussed pending orders and agreed not to trade in particular currencies. (191) 3. New York Department of Financial Services

      On the same day the Department of Justice and Federal Reserve announced fines and criminal penalties in connection to FX market manipulation, the New York Department of Financial Services announced a fine against Barclays in connection with this same scheme for violations of New York Banking Law. (192) In its press release, the NYDFS added that it would continue to investigate Barclays' use of electronic FX trading. (193) On November 18, 2015, the NYDFS announced an additional $150 million fine for Barclays' use of its "Last Look" system (194) in FX trading. (195) The use of this electronic trading system would automatically reject any orders from the bank's customers that would not ultimately be profitable. (196)

  2. International Authorities

    The Heads of State and the Government of the Group of Twenty (G20) established the Financial Stability Board in 2009. (197) The international body of twenty countries seeks to review and promote international financial stability. (198) In response to concerns regarding the integrity of the FX markets, the Board has issued a report and set out a number of recommendations to reform the FX market and benchmark rates. (199)

    The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom, operating under the regulatory jurisdiction of the Financial Services Act of 2012. (200) Spot transactions are not deemed to fall under this Act as a qualifying investment, and therefore, FX spot transactions cannot apply to the market abuse regime under the FCA's Code of Market Conduct guidelines. (201)

    On November 12, 2014, the FCA announced they would impose a $1.7 billion fine on five banks, Citibank, HSBC, JPMorgan Chase, RBS, and UBS, for "failing to control business practices" related to the FX operations. (202) On May 20, 2015, the FCA announced an additional 284 million GBP (approximately $441 million) fine on Barclays for the same. (203) Noticeably, the fines were imposed because of the banks' unsound internal practices, rather than for manipulating the FX markets. (204) The FCA, in connection with the Bank of England and the HM Treasury, (205) also established a review by the three U.K. authorities to research and make recommendations regarding the foreign exchange market, along with others. (206) This review, called the Fair and Effective Markets Review, has included recommendations and is widely cited in considerations of policy and regulatory change in this market. (207)

    The Swiss Financial Market Supervisory Authority (FINMA) is "Switzerland's independent financial-markets regulator." (208) FINMA issued an order against UBS on November 12, 2014 charging the bank with attempting to manipulate foreign benchmarks and fining the bank $139 million. (209) FINMA also levied bans from the FX market against six traders at UBS in December 2015. (210) In July, the Brazilian antitrust agency also began looking into FX manipulation affecting their currency, the real. (211)

  3. Internal Banking Regulations

    One of the most prominent reasons cited for the regulatory exemption of the FX markets for decades has been that the market is regulated by the banks' internal regulations, and additional regulatory jurisdiction would be duplicitous. (212) Additionally, as explained by the Final Report of the Fair and Effective Markets Review, published in June 2015: "[r]eflecting the challenge of devising a single global regulatory framework for a market that trades around the clock across multiple jurisdictions, standards in spot FX have historically been guided by voluntary sets of principles drawn up on a national basis." (213) Yet, the report goes on to state: "[i]t became clear through recent enforcement cases that few firms had integrated the provisions of these codes into their internal control systems." (214) In fact, each regulatory body to bring charges or fines against the banks in connection with the FX manipulation, cited to the lack of internal controls and adequate oversight policies in addition to manipulation charges, if not exclusively. (215) As a result, the banks have agreed to revamp their internal control structure and policies and procedures in order to address the issues exposed in light of these investigations. (216)

  4. Repercussions of the Manipulation Scheme

    The effects of the FX manipulation scheme are far from over. As of yet, more than thirty traders have been fired, (217) while one RBS trader was arrested in December 2014 although he was not charged with an offense. (218) Private lawsuits (219) have been filed in the U.K. and the United States even before the investigation results were released and the banks pleaded guilty; some have been consolidated, some have settled, and some are outstanding. (220) A further seven banks continue to face litigation in the United States from investors over forex rigging, including Deutsche Bank, Morgan Stanley, and Standard Chartered. (221) Bank of America settled a private lawsuit for its conduct in the FX scheme on April 29, 2015 for $180 million. (222)

    The economic impact of the scheme is difficult to define precisely. The manipulation "inflated the banks' profits while harming countless consumers, investors and institutions around the globe--from pension funds to major corporations, and including the banks' own customers," according to U.S. Attorney General Loretta Lynch. (222) Britain's chief market regulator recently called the exchange rate manipulation scheme the "biggest series of quantifiable wrongdoing in the history of our financial services industry." (224) As a result, the market expected a significant increase in regulation, although that has not happened quite yet. (225)

    As it stands, there is no agency with regulatory jurisdiction over the spot market. While the CFTC and DOJ prohibit and have enforcement authority over manipulation and collusion, respectively, there has yet to be any practical consequence of this manipulation scheme.


    In light of the manipulation scandal, one contention that is largely understood is that change is inevitable in the FX market. The prospect of new regulations or internal controls are expected to soon change the landscape of the market, "and plenty of potential solutions have been supplied, including creating a banking union, introducing a single-reserve currency, creating one global regulator, or putting FX trading on exchange, giving as a few examples." (226) However, it is far from agreed upon what these new regulations will look like and if they should come at all. This Part discusses positions against and for additional regulations and various proposals for the FX market. Part A details a number of arguments against additional regulations in the market. Part B provides an explanation of those arguments for new regulations and oversight. Part C provides an explanation of the criminal jurisdiction over the foreign currency market and the criminal consequences of the scheme.

  5. The Market Should Remain Unregulated

    The FX market, and the spot market in particular, is one of self-regulation. No agency monitors or has authority over it. (227) The few regulations that exist stem from firms' obligations as financial institutions and are governed by banking regulators. (228) The banks themselves, who have adamantly argued for the preservation of this model, (229) enforce these regulations and guidelines internally. (230) One important reason for this regulatory model is that market participants, major international banks, are all financially sophisticated and do not require the protection of regulations like those in the securities or derivatives market. (231) The market's...

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