More Bank Settlements Coming in Widening Currency Case

Photo
Timothy Massad, chairman of the United States Commodity Futures Trading Commission.Credit Jonathan Ernst/Reuters

As authorities in the United States and Britain ready actions this week against giant banks suspected of manipulating the foreign currency market, both the number of government agencies involved and the cost of settling the cases continues to grow.

The banks learned on Monday that the Commodity Futures Trading Commission in Washington was planning to announce its own settlements in the case, according to people briefed on the matter. That ended weeks of suspense over whether the agency would act in coordination with British authorities and American banking regulators. The agency is expected to level around $300 million in fines against each of the banks, the people said, with the worst offenders paying slightly more and marginal players somewhat less.

The trading commission, the Financial Conduct Authority of Britain and the Office of the Comptroller of the Currency in Washington are planning to announce settlements early on Wednesday.

But as of late Monday, it was unclear how many banks the trading commission would act against. The agency has held settlement talks with the same six banks that are settling with the British regulator — Barclays, JPMorgan Chase, Citigroup, the Royal Bank of Scotland, UBS and HSBC — but hurdles remain. Some of the banks still need to receive approval from their boards before settling with the trading commission, the people said, and at least one bank continues to negotiate with the agency.

Video

The Foreign Currency Fix

Regulators say that a group of London traders, known as the “cartel” and the “mafia,” illegally dipped into the $5.3-trillion-a-day currency trade.

By Channon Hodge, Aaron Byrd and David Gillen on Publish Date March 11, 2014. Photo by Aaron Byrd/The New York Times.

The trading commission’s involvement in the case is a double-edged sword for the banks. A settlement with the agency would afford them the so-called global settlement they have long sought, providing closure on most of their civil legal exposure stemming from the foreign currency case.

But the trading commission is expected to impose tougher language in its settlement than its British counterparts. The American agency, the people briefed on the matter said, will accuse the banks of manipulating benchmarks for foreign currencies, the largest and yet least regulated market in the financial world, rather than simply not having in place systems or controls to prevent manipulation.

The trading commission’s role in the case — the first huge enforcement action under the agency’s new chairman, Timothy Massad, and enforcement director, Aitan Goelman — also raises the overall price tag of the deal. Its penalties would come on top of payouts to the Financial Conduct Authority, Britain’s financial watchdog, which plans to settle with all six banks this week for a total of about £1.2 billion, or $1.9 billion.

The Office of the Comptroller of the Currency, a banking regulator in Washington, is also planning to settle with some of the banks involved in the so-called global settlement. Separately, the comptroller’s office is poised to announce a settlement with Bank of America.

Over the last few weeks, the banks have been signaling that huge payouts were looming. Citigroup and Bank of America actually revised their previously reported earnings for the third quarter to take the settlements into account.

The series of settlements will close the first chapter of the foreign exchange investigation, which has rattled the banking world since it first came to light last year. The next phase of the case will most likely be more painful, as the focus shifts to criminal investigations and individual liability.

The Justice Department, which will sit out the first round of settlements, is investigating potential criminal misconduct among the players in the foreign currency market. Prosecutors are aiming to file a case against at least one bank by the end of the year, the people briefed on the matter said, and might ultimately indict several bank employees.

In the coming months, the trading commission and the F.C.A. of Britain will also switch gears, taking on the banks that are not yet involved in settlement talks. For example, Deutsche Bank, one of the biggest players in the foreign exchange market, will be a focus of the continuing inquiries.

The F.C.A. is expected to charge the banks with failing to have systems and controls in place to prevent misconduct in the foreign exchange market. Some banks may be charged with allowing bankers to front-run client activity in their personal accounts.

The investigation is reminiscent of accusations about manipulating the London interbank offered rate, or Libor, used as a benchmark for credit cards, student loans and other loans. The setting of the Libor rate was unregulated, posing a challenge for regulators who uncovered misconduct related to it.

In Britain, lawmakers in 2013 made it illegal to manipulate Libor, but failed to add any other benchmarks. Following a review of financial market practices, the British government may add other benchmarks under the umbrella of regulated activities and make manipulation of them illegal.

Nemat Shafik, the deputy governor of the Bank of England, which is conducting the review with the F.C.A. and the Treasury, said earlier this month that “Fixing these markets is essential to restore trust — among participants, and among the public.”

The foreign exchange scandal emerged after the financial crash and fueled anger toward the financial sector.

“The risk is that, as memories of recent enforcement actions fade, bad practices may re-emerge. Some say that may already be happening,” she said.

Not everyone seems optimistic about how things are going.

In a recent opinion column in The Financial Times newspaper, Richard Lambert, the founder of the Banking Standards Review, wrote that some banks were trying to root out problems and reform culture.

“But others still claim that the problem is to do with a few bad apples rather than anything more systemic, and are relying on occasional town hall meetings with employees and a lot of top-down instructions to shift behavior,” he wrote. “That will not deliver the fundamental change necessary.”