Fixed penalty

By T.E.

ONCE again, a handful of the world’s largest banks have agreed to pay vast amounts of money to settle an investigation, this time concerning the manipulation of benchmarks used in the trading of currencies. American, British and Swiss regulators clubbed together to squeeze six banks for $4.3 billion between them. Yet more fines may be in the pipeline.

The deal announced on November 12th follows a now familiar pattern: regulators release e-mails or instant messages they have harvested that indicate sleazy activity in an important market; banks issue statements that are contrite, emphatic about a commitment to moral values yet vague about what exactly occurred; no one charges any individuals with any crimes and lots of questions are left unanswered, including how the regulators calculated the penalties (Britain’s FCA being an honourable exception).

The banks—UBS, Royal Bank of Scotland, JPMorgan, Citigroup, HSBC and Bank of America—were nabbed tinkering with the price of a widely used daily benchmark. Known as the WM/Reuters “fix”, it sets prices for major currencies based on trades concluded during the 30 seconds either side of 4pm in London. The bankers involved diddled the fix to their own advantage. They colluded by sharing information about clients’ pending orders and adjusting their own prices accordingly. Easy profits and plentiful bonuses ensued. Losers included those whose foreign-exchange contracts were tied to the 4pm fix, including many firms and mutual funds.

Between 2008 and 2013, traders formed a cheery cartel, immortalised in online chat rooms whose contents have now been made public. “How can I make free money with no fcking heads up?” one HSBC banker asked. Others spoke of “double teaming” the “numpty’s” in the markets. The ethics were nearly as appalling as the spelling and grammar. A senior staffer at the Bank of England gave tacit blessing to some of the coordination (having been suspended in March, he was fired this week, apparently for unrelated reasons).

Regulators are particularly angered by the currency scandal because it came to light soon after banks were found to have tampered with LIBOR, a benchmark interest rate used to peg trillions in contracts globally. Banks paid fines (some are still negotiating them) and promised a change of culture they have failed to deliver.

Parallel investigations are still underway at two more regulators: America’s Department of Justice and New York’s Department of Financial Services, both of which have proven as eager to collect fees as the most aggressive bank. Huw van Steenis of Morgan Stanley, a rival bank, reckons this round of payments will end up accounting for only one-third to one-half of the total regulators will extract. Clients who can establish they have been wronged could push for compensation, too.

Barclays, a British bank under investigation on similar grounds, did not join the settlement—perhaps because it is holding out for a deal with all the different regulators involved. Meanwhile Deutsche Bank has learned that it will not face any action from British authorities.

While quotes from the traders involved were included in the various settlement documents, their names were not. A number of individuals in the foreign-exchange divisions of the banks concerned have been suspended or left, but none has been charged with any wrongdoing. In theory, civil or criminal charges could be forthcoming as part of the investigation underway at the Department of Justice.

Whatever the legal ins and outs, it seems odd to determine the price of a vast realm of financial products using a “fix”. Global regulators earlier this year contemplated the introduction of a global exchange that would have largely cut banks out of the business. They decided instead to expand the window of the 4pm benchmark from sixty seconds to five minutes.