"If you ain't cheating, you ain't trying": Barclays pays $2.4 billion for manipulating foreign exchange market
Now comes even more damning evidence, thanks to federal and state investigators, describing a $2.4 billion penalty related to a scheme to manipulate spot trading in the foreign exchange (FX) market.
The $2.4 billion includes payments of $485 million to the New York State Department of Financial Services, $400 million to the Commodities Futures Trading Commission, $710 million to the U.S. Department of Justice, $342 million to the Federal Reserve, and 284 million GBP (approximately $441 million) to the United Kingdom’s Financial Conduct Authority.
|See top left of today's New York Times front page|
As stated by New York State's Department of Financial Services (DFS):
Indeed, in a fair and functioning economic market, a business takes on risk in the hopes of earning a profit. However, Barclays’ traders coordinated with other banks to help remove that risk and instead just take profits at the expense of their clients. In other words, it was a “heads I win, tails you lose” trading system for Barclays.Also noted by DFS:
As the future Co-Head of UK FX Hedge Fund Sales (who was then a Vice President in the New York Branch) wrote in a November 5, 2010 chat: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”(Emphases in original)
Other banks involved
Citigroup Inc, JPMorgan Chase & Co, Barclays Plc, UBS AG and Royal Bank of Scotland Plc were accused by U.S. and UK officials of brazenly cheating clients to boost their own profits using invitation-only chat rooms and coded language to coordinate their trades.The New York Times reported, Rigging of Foreign Exchange Market Makes Felons of Top Banks:
In announcing the cases, the Justice Department emphasized that the banks’ parent companies entered the guilty pleas rather than a subsidiary, representing a new frontier in efforts to punish Wall Street misdeeds.The New York DFS press release, below, in full [emphases in original]
NYDFS ANNOUNCES BARCLAYS TO PAY $2.4 BILLION, TERMINATE EMPLOYEES FOR CONSPIRING TO MANIPULATE SPOT FX TRADING MARKET
Barclays Employee: “if you aint cheating, you aint trying”
Barclays FX Trader “[Y]es, the less competition the better”
NYDFS to Continue Its Investigation into Electronic FX Trading
Benjamin M. Lawsky, Superintendent of Financial Services, today announced that Barclays will pay $2.4 billion and is terminating eight additional Bank employees who engaged in misconduct for New York Banking Law violations in connection with its scheme to manipulate spot trading in the foreign exchange (FX) market. The overall $2.4 billion penalty Barclays will pay includes $485 million to the New York State Department of Financial Services (NYDFS), $400 million to the Commodities Futures Trading Commission (CFTC), $710 million to the U.S. Department of Justice (DOJ), $342 million to the Federal Reserve, and 284 million GBP (approximately $441 million) to the United Kingdom’s Financial Conduct Authority (FCA).
Today's NYDFS order concerning Barclays, however, does not release the Bank from any claims concerning electronic systems used in FX trading and electronic trading of FX and FX-related products. The Department will continue its investigation of these areas of activity.
Superintendent Lawsky said: “Put simply, Barclays employees helped rig the foreign exchange market. They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients. While today's action concerns misconduct in spot trading, there is additional work ahead. The Department's investigation of electronic foreign exchange trading – which makes up the vast majority of transactions in this market – will continue.”
Heads I Win, Tails You Lose FX Trading
A typical FX spot transaction involves the exchange of currencies at an agreed rate for settlement on a spot date—usually two business days from the trade date. In addition to trading directly in the market, clients can also submit “fix” orders to various large international banks, including Barclays, which then shoulder the risk of the trade and agree to deliver the requested currency to the client at the “fix” rate, which is determined at a subsequent time based on trading in the interdealer market.
Prior to a fix, clients place orders with banks (including Barclays) to buy or sell a specified amount of currency “at the fix rate”—i.e., the rate that would be determined at the upcoming fix. Traders with net orders to sell a certain currency at the fix rate make a profit if the average rate at which they buy the currency is lower than the fix rate at which they sell to their clients, while traders with net orders to buy a certain currency at the fix rate make a profit if the average rate at which they sell the currency is higher than the fix rate at which they buy from their clients.
Indeed, in a fair and functioning economic market, a business takes on risk in the hopes of earning a profit. However, Barclays’ traders coordinated with other banks to help remove that risk and instead just take profits at the expense of their clients. In other words, it was a “heads I win, tails you lose” trading system for Barclays.
From approximately 2008 through 2012, certain FX traders at Barclays communicated with FX traders at other banks to coordinate attempts to manipulate prices in certain FX currency pairs and certain FX benchmark rates, including the WM/R and ECB fixes. The majority of these communications took place in multi-bank online chat rooms.
Certain FX traders at Barclays routinely participated in these multi-bank chat rooms and often had multiple chat rooms open at the same time. In their attempts to manipulate these benchmarks in the chat rooms, Barclays FX traders exchanged information about the size and direction of their orders with FX traders at other banks, as well as coordinated trading, and discussed the spread between bids and offers which the banks were showing to customers. The exchange of information among the traders at multiple banks via the use of chat rooms facilitated this type of conduct.
One particular chat room, referred to as the “Cartel” included FX traders from Citigroup, JP Morgan, UBS, RBS and Barclays who specialized in trading the Euro. Membership in this exclusive chat room was available by invitation only. Two Barclays EUR/USD traders were members of this chat room: one from December 2007 to July 2011 and another from December 2011 to August 2012. One Barclays FX trader, when he became the main Euro trader for Barclays in 2011, was desperate to be invited to join the Cartel because of the trading advantages from sharing information with the other main traders of the Euro. After extensive discussion of whether or not this trader “would add value” to the Cartel, he was invited to join for a “1 month trial,” but was advised “mess this up and sleep with one eye open at night.” This trader ultimately survived his “trial” and was permitted to remain in the Cartel chat room until it was disbanded at some point in 2012.
FX traders at Barclays employed various strategies in their efforts to manipulate the fixes. One method was known as “building ammo,” whereby a single trader would amass a large position in a currency and then unload the “ammo” just before or during the fix to try to move prices.
On January 6, 2012, one Barclays trader, who was also a Head of the FX Spot desk in London, attempted to manipulate the ECB fix by unloading EUR 500 million right at the fix time, stating in the Cartel chat room “i saved 500 for last second” and in another chat room “i had 500 to jam it."
Without the active cooperation and coordination among the traders at multiple banks, via the use of chat rooms, the Barclays trader would have had neither the information to indicate that pushing the price was feasible, since there were not large contrary orders pending, nor the tools to attempt to accomplish that forced, temporary push lower.
An additional tactic for reducing the risks involved in seeking to manipulate market prices was for the traders at the various banks on a multi-bank chat to agree to stay out of each other’s way around the time of a fix, and avoid executing contrary orders while an effort to push prices was being deployed. Traders would also cooperate with price manipulation efforts by seeking to “clear the decks” of contrary orders early, in order not to dilute the deployment of the full “ammo” nearer to the fix, as part of an effort to move prices beyond the narrower range that would be maintained by a more routine, even execution of orders.
For example, in a June 28, 2011 chat with a trader from HSBC, a Barclays trader reported that another trader was building orders to execute at the fix contrary to HSBC’s orders but Barclays assisted HSBC by executing trades ahead of the fix to decrease that other trader’s orders: “He paid me for 186 . . . so shioud have giot rid of main buyer for u.”
In another discussion on a multi-bank chat, on December 1, 2011, with a trader from Citigroup, a Barclays trader indicated “If u bigger. He will step out of the way. . . We gonna help u.”
FX traders involved in the USD/Brazilian Real market colluded together to manipulate markets in a more straightforward manner—by agreeing to boycott local brokers to drive down competition. On October 28, 2009, an RBC trader wrote “everybody is in agreement in not accepting a local player as a broker?” A Barclays FX trader responded “yes, the less competition the better.”
Additional Efforts to Cheat Barclays Clients
On numerous occasions, from at least 2008 to 2014, Barclays employees on the FX Sales team engaged in misleading sales practices with clients. Sales employees applied “hard mark-ups” to the prices that traders gave them without their clients’ knowledge. A hard mark-up represents the difference between the price the trader gives a salesperson and the price the salesperson shows to the client.
FX Sales employees would determine the appropriate mark-up by calculating the most advantageous rate for Barclays that did not cause the client to question whether executing the transaction with the Bank was a good idea, based on the relationship with the client, recent pricing history, client expectations and other factors.
As one FX Sales employee wrote in a chat to an employee at another bank on December 30, 2009, “hard mark up is key . . . but i was taught early . . . u dont have clients . . . u dont make money . . . so dont be stupid.”
The practice of certain FX Sales Employees when a client called for a price quote was to mute the telephone line when asking the trader for a price, which would allow Sales employees to add mark-up without the client’s knowledge.
Mark-ups represented a key revenue source for Barclays and generating mark-ups was a high priority for Sales managers. As the future Co-Head of UK FX Hedge Fund Sales (who was then a Vice President in the New York Branch) wrote in a November 5, 2010 chat: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”
On June 26, 2009, after one FX Sales employee appeared to admit to another Sales employee that he “came clean” about charging a hard mark-up after a client called him out on it, the second employee stated “i wouldnt normally admit to clients if you pip them. i think saying you rounded is fine.” The first employee agreed, and replied that he didn’t actually come clean to the client, but rather “said i was rounding.”
On September 23, 2014, another FX Sales employee applied a mark-up to a client’s trade. The client called and asked if had applied a mark-up, and this Sales employee lied and said that he had not.
Another misleading sales practice was giving a client the worst (or a worse) rate that was reached during a particular time interval, even if the trader was able to execute the order at a better price. The more favorable fill generated a profit, which Barclays would keep, in whole or in part, without providing disclosure to the client.
A similar practice was to tell clients that their orders had been only partially filled, when in fact the FX Sales employees were holding back a portion of the fill as the market moved in Barclays’ favor, permitting Barclays to generate an undisclosed profit at the client’s expense.
Failures of Controls and Compliance
The misconduct at the Bank was systemic and involved various levels of employees, including a lack of appropriate supervision or intervention by certain managers both of FX trading desks and of FX Sales staff.
The culture within the Bank valued increased profits with little regard to the integrity of the market. In May 2012, after noting that “Large fixes are the key to making money as we have more chance of moving the market our way,” a Barclays senior trader announced an “added incentive” for Sales employees of 50% of profits made for increasing trading volume at certain fix orders. In response, the head of the FX Spot desk in New York noted that “the ideas put forward in this mail are exactly what we are looking for.” The revenue produced by an FX trader’s trading activity impacted the compensation of FX traders, along with other factors.
During the relevant time period, although Barclays had general policies in place regarding trading and sales activity, those policies were not specifically designed for the FX business. The guidance Barclays did provide focused on insider trading risk and regulations that were not relevant to the foreign exchange market, which effectively left it up to individual traders to determine what kind of conduct was appropriate.
Warning signs alerted the Bank to weaknesses in its controls with respect to the FX business, but the Bank failed to take appropriate action. Although the Bank took steps, beginning in mid-2012, to address certain risks associated with the use of multi-bank chat rooms, it did not investigate the conduct that occurred in such chat rooms until mid-2013.
Specifically, in March 2012, Barclays discovered that an employee on the Sales desk had revealed, on one of his Reuters distribution lists, confidential information about an FX trade that had been executed by a Barclays client.
Barclays' initial response to this incident was to conduct a review that identified who had leaked the confidential information. Thereafter, the Bank performed an additional review of the chats of only one trader who has now been identified as having engaged in some of the trading misconduct described in this Order. This additional review was assigned to a single Barclays employee in the Compliance division.
The Compliance employee who reviewed the chats looked only for confidential client information sharing, derogatory references to clients and bad language, but failed to discover any of the efforts to manipulate the benchmark rates described above.
In May 2012, the Bank held workshops with FX traders and FX sales personnel to discuss market color and confidential information sharing. At one of these workshops, traders discussed their efforts to coordinate the FX fixes. During and following these workshops, traders asked for guidance from the Compliance and Legal divisions about proper communications in the multi-bank chat rooms, but never received the requested guidance until October and December 2012.
Around the same time that certain FX traders raised concerns to Compliance about information sharing regarding and efforts to coordinate FX fixes in multi-bank chats, Barclays entered into a global settlement relating to the manipulation of other key benchmark rates, most notably the London Interbank Offered Rate (“LIBOR”). The LIBOR settlements took place on June 27, 2012.
Despite learning about FX traders’ information sharing in chat rooms at least as early as May 2012 while simultaneously entering into a settlement concerning persistent misconduct relating to the manipulation of key benchmark rates, which included misconduct by traders in chat rooms, Barclays did not shut down the use of interbank chat rooms by FX traders until October 2012 and by other lines of business until 2013. Further, Barclays did not begin a full investigation of FX trading misconduct until the publication of a Bloomberg article in June 2013.
A number of Barclays employees that were involved in the wrongful conduct discussed in this Order, including a director on the FX Spot trading desk in London, a director on the FX Spot trading desk in New York, a director on the Emerging Markets desk in New York, a managing director in FX Hedge Fund Sales in New York, a director in FX Real Money Sales in New York, and an assistant vice president in FX Hedge Fund Sales in London, are no longer employed at the Bank.
As a result of the investigation, four Barclays employees have been terminated in the last month: the Global Head of FX Spot trading in London, an assistant vice president on the FX Spot trading desk in London, a director on the FX Spot trading desk in London and a director on the FX Spot trading desk in New York.
Certain employees involved in the wrongful conduct have been suspended or placed on paid leave but remain employed by the Bank. The Department orders the Bank to take all steps necessary to terminate the following four employees, who played a role in the misconduct discussed in this Consent Order but who remain employed by the Bank: a vice president on the Emerging Markets trading desk in New York, two directors on the FX Spot trading desk in New York and a director on the FX Sales desk in New York (who previously was Co-Head of UK FX Hedge Fund Sales in London).
To view a copy of today's NYDFS order regarding Barclays, please visit, link.
Department of Justice press release
Five Major Banks Agree to Parent-Level Guilty Pleas
Five major banks – Citicorp, JPMorgan Chase & Co., Barclays PLC, The Royal Bank of Scotland plc and UBS AG – have agreed to plead guilty to felony charges. Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland plc have agreed to plead guilty to conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market and the banks have agreed to pay criminal fines totaling more than $2.5 billion. A fifth bank, UBS AG, has agreed to plead guilty to manipulating the London Interbank Offered Rate (LIBOR) and other benchmark interest rates and pay a $203 million criminal penalty, after breaching its December 2012 non-prosecution agreement resolving the LIBOR investigation.
Attorney General Loretta E. Lynch, Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office and Director Aitan Goelman of the Commodity Futures Trading Commission’s Division made the announcement.
“Today’s historic resolutions are the latest in our ongoing efforts to investigate and prosecute financial crimes, and they serve as a stark reminder that this Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers,” said Attorney General Lynch. “The penalty these banks will now pay is fitting considering the long-running and egregious nature of their anticompetitive conduct. It is commensurate with the pervasive harm done. And it should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare.”
“The charged conspiracy fixed the U.S. dollar – euro exchange rate, affecting currencies that are at the heart of international commerce and undermining the integrity and the competitiveness of foreign currency exchange markets which account for hundreds of billions of dollars worth of transactions every day,” said Assistant Attorney General Baer. “The seriousness of the crime warrants the parent-level guilty pleas by Citicorp, Barclays, JPMorgan and RBS.”
“The five parent-level guilty pleas that the department is announcing today communicate loud and clear that we will hold financial institutions accountable for criminal misconduct,” said Assistant Attorney General Caldwell. “And we will enforce the agreements that we enter into with corporations. If appropriate and proportional to the misconduct and the company’s track record, we will tear up an NPA or a DPA and prosecute the offending company.”
“These resolutions make clear that the U.S. Government will not tolerate criminal behavior in any sector of the financial markets,” said Assistant Director in Charge McCabe. “This investigation represents another step in the FBI’s ongoing efforts to find and stop those responsible for complex financial schemes for their own personal benefit. I commend the special agents, forensic accountants, and analysts, as well as the prosecutors for the significant time and resources they committed to investigating this case.”
According to plea agreements to be filed in the District of Connecticut, between December 2007 and January 2013, euro-dollar traders at Citicorp, JPMorgan, Barclays and RBS – self-described members of “The Cartel” – used an exclusive electronic chat room and coded language to manipulate benchmark exchange rates. Those rates are set through, among other ways, two major daily “fixes,” the 1:15 p.m. European Central Bank fix and the 4:00 p.m. World Markets/Reuters fix. Third parties collect trading data at these times to calculate and publish a daily “fix rate,” which in turn is used to price orders for many large customers. “The Cartel” traders coordinated their trading of U.S. dollars and euros to manipulate the benchmark rates set at the 1:15 p.m. and 4:00 p.m. fixes in an effort to increase their profits.
As detailed in the plea agreements, these traders also used their exclusive electronic chats to manipulate the euro-dollar exchange rate in other ways. Members of “The Cartel” manipulated the euro-dollar exchange rate by agreeing to withhold bids or offers for euros or dollars to avoid moving the exchange rate in a direction adverse to open positions held by co-conspirators. By agreeing not to buy or sell at certain times, the traders protected each other’s trading positions by withholding supply of or demand for currency and suppressing competition in the FX market.
Citicorp, Barclays, JPMorgan and RBS each have agreed to plead guilty to a one-count felony charge of conspiring to fix prices and rig bids for U.S. dollars and euros exchanged in the FX spot market in the United States and elsewhere. Each bank has agreed to pay a criminal fine proportional to its involvement in the conspiracy:
- Citicorp, which was involved from as early as December 2007 until at least January 2013,has agreed to pay a fine of $925 million;
- Barclays, which was involved from as early as December 2007 until July 2011, and then from December 2011 until August 2012, has agreed to pay a fine of $650 million; [Barclays plea agreement]
- JPMorgan, which was involved from at least as early as July 2010 until January 2013, has agreed to pay a fine of $550 million; and
Barclays has further agreed that its FX trading and sales practices and its FX collusive conduct constitute federal crimes that violated a principal term of its June 2012 non-prosecution agreement resolving the department’s investigation of the manipulation of LIBOR and other benchmark interests rates. Barclays has agreed to pay an additional $60 million criminal penalty based on its violation of the non-prosecution agreement.
- RBS, which was involved from at least as early as December 2007 until at least April 2010, has agreed to pay a fine of $395 million.
In addition, according to court documents to be filed, the Justice Department has determined that UBS’s deceptive currency trading and sales practices in conducting certain FX market transactions, as well as its collusive conduct in certain FX markets, violated its December 2012 non-prosecution agreement resolving the LIBOR investigation. The department has declared UBS in breach of the agreement, and UBS has agreed to plead guilty to a one-count felony charge of wire fraud in connection with a scheme to manipulate LIBOR and other benchmark interest rates. UBS has also agreed to pay a criminal penalty of $203 million.
According to the factual statement of breach attached to UBS’s plea agreement, UBS engaged in deceptive FX trading and sales practices after it signed the LIBOR non-prosecution agreement, including undisclosed markups added to certain FX transactions of customers. UBS traders and sales staff misrepresented to customers on certain transactions that markups were not being added, when in fact they were. On other occasions, UBS traders and sales staff used hand signals to conceal those markups from customers. On still other occasions, certain UBS traders also tracked and executed limit orders at a level different from the customer’s specified level in order to add undisclosed markups. In addition, according to court documents, a UBS FX trader conspired with other banks acting as dealers in the FX spot market by agreeing to restrain competition in the purchase and sale of dollars and euros. UBS participated in this collusive conduct from October 2011 to at least January 2013.
In declaring UBS in breach of its non-prosecution agreement, the Justice Department considered UBS’s conduct described above in light of UBS’s obligation under the non-prosecution agreement to commit no further crimes. The department also considered UBS’s three recent prior criminal resolutions and multiple civil and regulatory resolutions. Further, the department also considered that UBS’s post-LIBOR compliance and remediation efforts failed to detect the illegal conduct until an article was published pointing to potential misconduct in the FX markets.
Citicorp, Barclays, JPMorgan, RBS and UBS have each agreed to a three-year period of corporate probation, which, if approved by the court, will be overseen by the court and require regular reporting to authorities as well as cessation of all criminal activity. All five banks will continue cooperating with the government’s ongoing criminal investigations, and no plea agreement prevents the department from prosecuting culpable individuals for related misconduct. Citicorp, Barclays, JPMorgan and RBS have agreed to send disclosure notices to all of their customers and counter-parties that may have been affected by the sales and trading practices described in the plea agreements.
Today, in connection with its FX investigation, the Federal Reserve also announced that it was imposing on the five banks fines of over $1.6 billion; and Barclays settled related claims with the New York State Department of Financial Services (DFS), the Commodity Futures Trading Commission (CFTC) and the United Kingdom’s Financial Conduct Authority (FCA) for an additional combined penalty of approximately $1.3 billion. In conjunction with previously announced settlements with regulatory agencies in the United States and abroad, including the Office of the Comptroller of the Currency (OCC) and the Swiss Financial Market Supervisory Authority (FINMA), today’s resolutions bring the total fines and penalties paid by these five banks for their conduct in the FX spot market to nearly $9 billion.
This investigation is being conducted by the FBI’s Washington Field Office.This prosecution is being handled by the Antitrust Division’s New York Office and other criminal enforcement sections and the Criminal Division’s Fraud Section.The Justice Department appreciates the substantial assistance provided by the CFTC, OCC, FINMA, FCA, DFS, Securities and Exchange Commission, Federal Reserve Board, and the U.K. Serious Fraud Office. The Criminal Division’s Office of International Affairs and the U.S. Attorney’s Office in the District of Connecticut have also provided assistance in this matter.