European Commission Fines Five Global Financial Institutions €1.07 Billion for Participation in Foreign Exchange Spot Trading Cartel

On May 16, the European Commission (EC) announced that in two settlement decisions, it fined five global financial institutions — Barclays, The Royal Bank of Scotland (RBS), Citigroup, JPMorgan, and MUFG Bank (formerly Bank of Tokyo-Mitsubishi) – “for taking part in two cartels in the Spot Foreign Exchange market for 11 currencies – Euro, British Pound, Japanese Yen, Swiss Franc, US, Canadian, New Zealand and Australian Dollars, and Danish, Swedish and Norwegian crowns.”

The first EC decision (labeled the “Forex – Three Way Banana Split” cartel, for reasons explained below) imposes a total fine of €811,197,000 on Barclays, RBS, Citigroup, and JPMorgan.  The second EC decision (labeled the “Forex- Essex Express” cartel) imposes a total fine of €257 682 000 on Barclays, RBS and MUFG Bank (formerly Bank of Tokyo-Mitsubishi).

The EC explained that in foreign exchange (“Forex”) currency trading, “Forex spot order transactions are meant to be executed on the same day at the prevailing exchange rate.”  It stated that the 11 currencies listed above are “the most liquid and traded currencies worldwide” and five of which are used in the European Economic Area (EEA).  The EC stated that its investigation

revealed that some individual traders in charge of Forex spot trading of these currencies on behalf of the relevant banks exchanged sensitive information and trading plans, and occasionally coordinated their trading strategies through various online professional chatrooms.

The commercially sensitive information exchanged in these chatrooms related to:

1)     outstanding customers’ orders (i.e. the amount that a client wanted to exchange and the specific currencies involved, as well as indications on which client was involved in a transaction),

2)     bid-ask spreads (i.e. prices) applicable to specific transactions,

3)     their open risk positions (the currency they needed to sell or buy in order to convert their portfolios into their bank’s currency), and

4)     other details of current or planned trading activities.

The EC also noted that these information exchanges, following the tacit understanding that the participating traders reached,

enabled them to make informed market decisions on whether to sell or buy the currencies they had in their portfolios and when.

Occasionally, these information exchanges also allowed the traders to identify opportunities for coordination, for example through a practice called “standing down” (whereby some traders would temporarily refrain from trading activity to avoid interfering with another trader within the chatroom).

According to the EC, “[m]ost of the traders participating in the chatrooms knew each other on a personal basis.”  For example, “one chatroom was called Essex Express ‘n the Jimmy because all the traders but ‘James’ lived in Essex and met on a train to London.” In addition, some of the traders “created the chatrooms and then invited one another to join, based on their trading activities and personal affinities, creating closed circles of trust.” Moreover, “[t]he traders, who were direct competitors, typically logged in to multilateral chatrooms on Bloomberg terminals for the whole working day, and had extensive conversations about a variety of subjects, including recurring updates on their trading activities.”

Under Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 53 of the EEA Agreement, cartels and other restrictive business practices are prohibited.  The EC reported that its investigation established the existence of two distinct infringements of those provisions, concerning foreign exchange spot trading.  The first infringement – termed the “Three Way Banana Split” infringement –began on December 18, 2007 and ended on January 31, 2013.  It involved communications in three different, consecutive chatrooms (labeled “Three way banana split / Two and a half men / Only Marge”) among traders from UBS, Barclays, RBS, Citigroup, and JPMorgan. The infringement.

The second infringement – termed the “Essex Express infringement” – began on December 14, 2009 and ended on July 31, 2012.  It involved communications in two chatrooms (labeled “Essex Express ‘n the Jimmy” and “Semi Grumpy Old men”) among traders from UBS, Barclays, RBS, and Bank of Tokyo-Mitsubishi (now MUFG Bank).

The fines that the EC imposed reflected, in particular, the sales value in the EEA that the cartel participants achieved for the products in question, as well as the serious nature, geographic scope, and duration of the infringement.  The EC also stated that under its 2006 Leniency Notice, “UBS received full immunity for revealing the existence of the cartels.”  That disclosure enabled UBS to avoid what the EC calculated would have been an aggregate fine of approximately €285 million.

In the Three Way Banana Split infringement, the EC noted that “all banks involved benefited from reductions of their fines for their cooperation with the Commission investigation,” and that the reductions “reflect the timing of their cooperation and the extent to which the evidence they provided helped the Commission to prove the existence of the cartel in which they were involved.”  In the Essex Express infringement, the ECD noted that “all banks except one benefited from reductions of their fines for their cooperation with the Commission investigation,” and that those reductions “reflect the timing of their cooperation and the extent to which the evidence they provided helped the Commission to prove the existence of the cartels in which they were involved.”  It also noted that MUFG Bank (formerly Bank of Tokyo-Mitsubishi) “did not apply for leniency.”  Finally, it explained that under its 2008 Settlement Notice, it “applied a reduction of 10% to the fines imposed on the companies in view of their acknowledgment of participation in the cartels and of their liability in this respect.”

Note: Compliance teams in financial institutions – not just those engaged in Forex trading — should brief senior executives about these EC decisions, and provide guidance about the specific kinds of trader behaviors that the EC evidently considered probative of collusive conduct.  Because other types of trading also involve rapid execution of transactions, compliance teams at firms that engage in one or more types of trading should also review their firms’ internal controls, to see whether brokers or traders participate in any online fora (like the chatrooms at issue in the Forex decisions), and if so, whether monitoring of brokers’ or traders’ participation in those fora is effective in detecting potential coordinating or collusive exchanges of information.

In its Forex release, the EC briefly commented that it “will continue pursuing other ongoing procedures concerning past conduct in the Forex spot trading market.”  Financial institutions doing business in the European Union, however, should expect that the EC’s Directorate-General for Competition would readily investigate similar conduct by other types of traders.

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