Regulators are beefing up investigations pertaining to foreign exchange (forex) misconduct committed by several global banks. Recently, two global banking giants – UBS Group AG (UBS - Free Report) and Barclays PLC (BCS - Free Report) have come under further scrutiny of the US Department of Justice (DOJ). The news was first reported by the Financial Times.
The DOJ is investigating whether the Swiss banking giant UBS and UK-based Barclays sold forex structured products concealing the profit the banks were deriving from currency trades which were used to generate the products’ returns.
In the banks’ products in question, while trading, an investor sells in a low-yielding currency and purchases in a higher yielding currency. Notably, UBS’ product – UBS V10 Enhanced FX Carry Strategy – allows investors to shift their positions in a volatile currency market. The DOJ is scrutinizing whether UBS derived profits from switching positions, and whether the company revealed profits to its clients.
‘Optimised currency carry strategy’ is a similar product offered by Barclays that has been targeted by the DOJ.
DOJ’s enquiry includes several other banks that are suspected to have misrepresented pricing for the currency transactions and this substantially expands its investigation into the forex market manipulation.
No Respite from Regulators
Global authorities are investigating in the $5.3 trillion-a-day forex market as traders at several banks are believed to have conspired jointly and misused information about client orders, which led to the price manipulation. Also, the metal business of a number of banks has come under the regulatory scrutiny in recent times.
Notably in Nov 2014, UBS along with four other major global banks – Citigroup Inc. (C - Free Report) , HSBC Holdings plc (HSBC - Free Report) , Bank of America Corp. (BAC - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) were slammed with a $3.4 billion fine by U.S., British and Swiss regulators related to forex market manipulation. (Read more: Another Blow to Global Banks: Fined Billions for FX Manipulation)
As per the findings of The Swiss Financial Market Supervisory Authority FINMA, UBS had inadequate risk management, controls and compliance in its forex trading. Infringement of control requirements and misbehavior of the employees, led to severe violation of appropriate business conduct requirements, which led to charges worth CHF134 million ($139 million) on UBS by FINMA in Nov 2014.
While FINMA concluded its ‘enforcement proceedings’ against UBS with respect to the forex trading, the regulator is investigating against the bank’s 11 ex and current employees in the related matter.
Apart from FINMA, the Swiss Banking giant had also reached settlements with the US Commodity Futures Trading Commission (CFTC) and UK Financial Conduct Authority (FCA) over the regulators’ industry-wide probe into inconsistencies foreign exchange market. In total, the company was slapped with a penalty of around CHF 774 million ($800 million) by the regulators.
UBS has been striving to expedite its internal forex and precious metals business investigations. The company is believed to be in separate discussions over a forex settlement with the DOJ’s criminal division, which may not be reached before Apr 2015 as per the Financial Times. The bank is likely to get some reprieve from the DOJ owing to its promptness in providing necessary information and aiding the investigation process.
Barclays was not part of the huge settlement of November. However, an investigation by the FCA is continuing over the company. Notably, in May 2014, Barclays was fined £26 million by the FCA for fixing gold prices. (Read more: Barclays Fined for Gold Rigging)
Regulatory authorities are investigating scandals further related to the heightening foreign exchange rate fixing and are determined to put forward a landmark judgment to terminate such practices in the future, bring justice to the sufferers and punish the wrongdoers. While probable settlements of such issues will put to rest a long-drawn investigation and bring a reprieve to the banks, these are likely to impact the companies’ financials and call for more transparency and disclosure in their dealings.