Tremendous damage has been done to the reputation, and now the balance sheets, of six major financial institutions over the last year, culminating in yesterday’s unanimous decision by regulatory authorities in Switzerland, Great Britain and the United States to draw their investigations into FX rate fixing to a close and issue $3.3 billion in fines.
Whilst the long, drawn out and high profile investigations which involved not only financial services regulators but senior peers, law enforcement agencies and criminal investigators now closed and filed, the ensuing fall out has likely only just begun.
At an early stage in the investigation, British and American regulators had begun suspecting that information used to manipulate FX benchmarks was being conveyed between FX trading desks across many global banks by using secure messaging systems, which provide instant messages to closed networks of individuals.
Today, some of the messages which had been sent have been revealed, which include use of foul language when a trader at another bank did not pass information to the requester to enable manipulation before an order was executed, and egotistical mentions of ‘free money’ to refer to a rate fixing exercise which could be executed in favor of the bank that they work for in order to generate a vast gain.
In May last year, Bloomberg introduced a chat service for FX traders, complimenting the technology used in its instant messenger provided to banks. The expansion was largely influenced by the sweeping popularity among banks for the Bloomberg Professional messaging system which processes 200 million messages per day across tens of global banks.
As last year drew to a close, officials suspected that this type of technology was being abused by traders to pass messages to each other in order to fix rates, therefore played a large part in what was at the time allegations of rate manipulation.
Consequently, many banks, including JP Morgan and Deutsche Bank, two of the firms at the center of the rate fixing fines, banned inter-company use of all messaging products by all employees, restricting it to internal use only.
In December, Bloomberg introduced a compliance system which enabled companies using chat room conversations and instant messaging services to centralize compliance tools in a single location, containing administration, monitoring, search and retention functionality which aimed to provide a realtime view into company-wide conversations.
Indeed, suspicion of misuse of these systems was far from unfounded, as today, in the immediate aftermath of the conclusion of investigations, many conversations have been publically aired in mainstream media.
Whether the fine of $3.3 billion is enough to put paid to this kind of malpractice is yet to be discovered, as there has been no indication as to how much profit was gained by rate fixing, with only Switzerland’s FINMA having ordered UBS to disgorge all profits that were gained by this means, with the Financial Conduct Authority and the Commodity Futures Trading Commission instead stipulating fixed financial penalties.
Therefore, although the regulatory conclusion has been cast, the jury is still out as to whether arrogance will continue to prevail, or whether it will be the ultimate downfall of those involved.
Many of the chat room discussions were released by the CFTC and can be viewed here.
Charts and messaging examples courtesy of the Daily Mail and the Financial Conduct Authority.