The real price of forex manipulations: 5 banks fined $3.3 billion for benefiting their trading positions at the expense of their clients

On Wednesday, HSBC Holdings, Royal Bank of Scotland, UBS, Citigroup and J.P. Morgan Chase agreed to pay a total of about $3.3 billion to U.S., British and Swiss regulators to resolve allegations that they tried to manipulate the vast foreign-exchange market.

The CFTC settlement was for a total of about $1.4 billion, while the FCA portion was £1.1 billion ($1.75 billion).

The CFTC and FCA laid out what they said was a wide-ranging and long-running scheme by some of the world’s biggest currencies-dealing banks to put their own interests ahead of those of clients, sometimes endangering the market’s integrity.

As the regulators said, the misbehavior fell into at least three camps. Banks tried to manipulate a currencies benchmark that is widely used to set foreign-exchange rates across the industry and asset classes. The banks attempted to trigger so-called stop-loss orders with clients in a way to goose the banks’ trading profits. And in electronic chat-rooms known by terms including “the 3 musketeers,” the banks allowed traders to inappropriately share confidential information about their customers, including their identities and the trades that they were looking to transact.

The misconduct dated back into the previous decade and, more important, continued until fairly recently. The FCA said it detected problems as recently as October 2013. That is more than a year after U.S. and British authorities started punishing banks for their roles in trying to rig the London interbank offered rate, or Libor, the WSJ reports.

Settlements

Finma separately ordered UBS to pay 134 million Swiss francs ($139 million) to settle its probe. The Swiss regulator is also capping the variable compensation of UBS’s foreign-exchange and precious-metals staff to 200% of base salary for two years, obliging the bank to automate at least 95% of its foreign-exchange trading and appointing a third party to monitor ensure it sticks to the rules. Finma added that it was investigating 11 current and former UBS employees.

Barclays PLC, which had been in late-stage settlement talks with both regulators, pulled out at the last minute. The bank said in a statement that it had considered a settlement on “closely similar terms” to those announced on Wednesday but that after discussions with other regulators and authorities it had decided to seek a “more general coordinated settlement.” Barclays is being investigated by New York regulators as well as the U.S. Justice Department.

The Bank of England said Wednesday that it was not involved in any improper activity in the currencies market, but a spokesperson said the central bank had dismissed its chief currencies dealer for breaching internal policies. The findings of an independent review released by the central bank Wednesday found that one of its officials was aware that bank traders were sharing client information with each other in a way that may unnerve regulators. The information-sharing “is not necessarily improper, but can increase the potential for improper conduct,” the central bank’s oversight committee concluded in a report on its review of what the Bank of England knew about industry practices.

The settlement agreements published Wednesday offer glimpses of bank traders communicating with each other in electronic chat-rooms and other venues in ways that authorities say were improper. In some instances, the regulators said, the traders appeared to acknowledge that their communications were potentially crossing a line, as they emphasized the importance of only admitting into the chat rooms fellow traders who could be trusted.

The probe also indicated that some banks missed opportunities to detect the misconduct. At UBS, for example, whistleblowers started complaining internally about the bank’s foreign-exchange-trading practices starting in November 2010, according to the FCA. The complaints kept rolling in for a few years from multiple whistleblowers, but the Swiss bank failed to adequately investigate the complaints, the FCA said.

Penalties

In recent years, lenders have paid off tens of billions of dollars in penalties stemming from investigations into interest-rate manipulation, sanctions violations, and improperly selling a variety of financial products. The settlements come the latest in this series of penalties.

Wednesday’s deal is a rare example of regulators simultaneously settling allegations with multiple banks. Regulators are hoping to avoid a protracted settlement process that drags on for many years—the continuing investigation into manipulation of benchmark interest rates is approaching its seven-year anniversary. Banks, meanwhile, are eager to enter a group settlement that will avoid any one institution being singled out.

That method has prompted criticism. The U.S. Justice Department and New York’s financial regulator, for example, are sitting out of Wednesday’s deal, and the latter has complained about the possibility of it giving banks a “sweetheart deal.”

The investigation into possible manipulation of foreign-exchange markets began in spring 2013 when the FCA started looking into allegations of wrongdoing. The probe initially focused on a key industry benchmark—the so-called fix calculated daily by WM/Reuters—but quickly mushroomed into an industrywide investigation that also dug into personal trading by bank employees.

Even before Wednesday’s settlement, the investigation has had ripple effects. Many banks have banned their employees from communicating with rivals via electronic-chat programs. Banks including UBS have restricted their employees from trading in their own accounts and from using mobile phones on the trading floor.

More than 30 traders, including some from all banks involved in Wednesday’s settlement, have been fired or suspended as part of the probe.

Some of those individuals are still facing criminal investigations in the U.S. and U.K., which aren’t likely to wrap up until at least next year, according to people familiar with the matter.