“CURRENCY RIGGING” CARTELS: Lessons from a year ago.

It was 16 may 2019 when five banks were heavily fined by the European supranational enforcer for participating in two cartels in the Foreign Exchange Market. Investigations conducted by DG COMP found that traders from UBS, Barclays, RBS, Citigroup, JP Morgan and MUFG had been recklessly exchanging confidential information on currency operations since mid-December 2007. By tacitly following such a collusive path banks were in a proper position to keep an eye on their peers’ trading plans and act in the financial market accordingly. Such a behavior between competitors is banned by Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 53 of the EEA Agreement.

The Commissioner for Competition, Ms. Margrethe Vestager, sent a clear message that the Commission would tighten up its grip on all those who attempt to manipulate financial markets. In her words, in this particular case “the behavior of these banks undermined the integrity of the sector at the expense of the European economy and consumers”.

Foreign exchange traders of these banks, also known as ‘Forex’ traders, took advantage of knowing each other on a personal basis to share sensitive information concerning their respective currency trading strategies. Direct evidence of this currency rigging was found from a variety of messages that they send each other by means of online professional chatrooms. These communications enabled them to make informed market decisions, which otherwise would not have been able to make, on whether to sell or to buy the currencies they had in their portfolios and the proper timing to do so. This is especially relevant if taking into account how highly volatile the Forex market is and how profits may shoot through the roof if uncertainty in the market is narrowed down. Take note that Forex traders operate on behalf of the banks they work for and that amongst their customers it can be found: asset managers, pension funds, hedge funds, big companies and other banks. Thus, significant capital flows take place daily as a result of these traders’ performance.

Notably, from the findings of the investigation it could be highlighted that these banks had infringed EU antitrust rules through information exchanges on:

1)   Outstanding customers’ orders (namely, clients’ identities, the specific currencies involved in the transactions and the amounts of capital at stake).

2)  ‘Bid-ask spreads’ (in essence, the buying and the selling price between two currencies).

3)   The open risk position of each of the participants.

4)   And other details of the trading activities envisaged in the foreseeable future.

All this data sharing was traced from two different but parallel cartels: ‘The Three Way Banana Split’ cartel and the ‘Essex Express’ cartel. A global fine of €811 197 000 was imposed on Barclays, RBS, Citigroup and JPMorgan on occasion of the first of these cartels. Whereas €257 682 000 was fined on Barclays, RBS and MUFG Bank as a result of the second cartel.

Should not be overlooked that not long ago Barclays, RBS, Citigroup, JP Morgan and UBS, along other competitors, were object of a similar probe in the interest rate derivatives industry. As in the so-called ‘YIRD cartels’ of 2013, the Swiss investment bank, UBS, showed once again that it was the most “mentally sharp” of all cartel participants by benefiting from the leniency program of the Commission after revealing the existence of the cartel.

The other parties managed to capitalize on a 10% fine reduction by acknowledging their liability for the cartels. This fact highlights the growing success that the ‘settlement procedure’ has gained since its first implementation in 2008. Subsequently, except for UBS, each party to the cartel was fined consistently with the sales value in the EEA for the products/services involved in the collusion and the seriousness and duration of the infringement.

In accordance with the Press release of the Commission of 16 May 2016 the following penalties had to be covered respectively by each cartel participant: 

THREE WAY BANANA SPLIT
Company Reduction under Leniency Notice Reduction under Settlement Notice Fine (€)
UBS 100% 10% 0
Barclays 50% 10% 11107000
RBS 30% 10% 155499000
Citigroup 20% 10% 310776000
JPMorgan 10% 10% 228815000
TOTAL     811197000
ESSEX EXPRESS
Company Reduction under Leniency Notice Reduction under Settlement Notice Fine (€)
UBS 100% 10% 0
Barclays 50% 10% 94 217 000
RBS 25% 10% 93 715 000
BOTM   10% 69 750 000
TOTAL     257682000

*Miguel Verdeguer Segarra, Lawyer & Economist at Legal Notes

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