Foreign exchange traders buy and sell billions in currency every day, and their trades help set a benchmark that is used to value more than $3.6 trillion in funds held by pension plans, hedge funds, and other investment vehicles.
But foreign currency exchange (Forex) is vulnerable to exploitation because it is largely unregulated–it deals with immediate trades, which aren’t considered investments, so they aren’t subject to specific rules. And because it involves a $5.4 trillion a-day market, even a little difference in currency value can add up to a lot of money.
As first reported by Bloomberg News in June, Britain’s market supervisor, the Financial Conduct Authority (FCA), began looking into allegations that traders were rigging the currency exchange rates to boost their banks’ profits.
The Reuters/WM benchmark, which is used to value currency, is published daily at 4 p.m. in London, and rates are calculated from the median of all trades in a 60-second period. (London is the largest hub for currency trading, with 41 percent of trades conducted there, compared with just 19 percent in NY.)
Traders can rig the rate by pushing through trades before and during the 60-second window when the benchmark is set, a process known as “banging the close.” By moving the rate, it allows traders to boost trading profits.
By October, the U.S. Department of Justice and the Swiss Financial Market Supervisory Authority had also launched investigations into the alleged rate-rigging. These investigations were followed by numerous civil lawsuits against the big banks. On February 13, the District Court consolidated thirteen of the cases into one class action. Korein Tillery represents Haverhill Retirement System in the class action.
The class action, pending in the U. S. District Court for the Southern District of New York, alleges that traders at Deutsche Bank, Citigroup, Credit Suisse Group, JPMorgan Chase, Goldman Sachs, HSBC, Barclays, UBS, Lloyds Bank, Morgan Stanley, and Royal Bank of Scotland (RBS), violated federal antitrust law when they divulged sensitive material in chat rooms and through instant messages to move key benchmark rates in favor of the banks over their customers. (The banks have declined comment and the currency traders, who were known in chat rooms as “The Cartel” and “The Bandits Club,” have denied any wrongdoing.)
While the Big Banks won’t publicly comment on the allegations, they have nonetheless, suspended or fired up to 25 traders. In October, RBS suspended two traders, and the following month Barclays suspended six traders. In January, Citigroup fired the head of its European spot currency trading desk after he had been placed on leave last year, and in February, Deutsche Bank, the largest player in the currency trading market, fired two traders in New York and the head of its emerging markets foreign exchange trading desk.
In the meantime, the class action continues to gain ground. The plaintiffs will file a consolidated complaint by the end of the month. Watch this space for updates.
Mary Ellen Egan