In the past few years, banks have combined to pay more than $5 billion in fines related to manipulation of the London interbank offered rate, or Libor, and other benchmark interest rates. In 2013, regulators in the United States, Britain, Germany, Switzerland, and Hong Kong started investigations into the currency markets. Dozens of foreign exchange traders, from some of the largest and most prestigious banks, including Barclays, UBS, and JPMorgan Chase, have been placed on leave over questions regarding collusion to manipulate benchmark currency rates.
The $4.7-trillion-a-day currency market is the biggest in the financial system and is the least regulated. Every day, a currency “fix,” known as the WM/Reuters rate, is established based on the price that currency trades at over a 60-second period. Traders eager to make a quick profit would buy up currencies just before they knew clients were going to buy large amounts of the same currency at the daily “fix.” Using this controversial practice, the traders could sell at a profit when the price rose at the “fix.” Some also appear to have passed on information to traders at other companies about big upcoming trades. Actions such as these, coordinated via chat rooms among traders, could have artificially raised the value of one currency against another. Rigged currency rates matter because exposure to currency swings can affect companies with operations in multiple countries, the value of options and funds tied to currency values, investments by ordinary shareholders, and even prices paid by consumers.
In recent days, Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland, and UBS all announced putting aside big sums for legal expenses, mostly related to currency rate manipulation. Citigroup announced on Thursday that it had set aside an additional $600 million on top of the $950 million already dedicated to legal costs. R.B.S. put aside $640 million. Barclays put $800 million in its legal reserves. Each bank has made it clear that the legal funds are in anticipation of legal fines arising from foreign exchange rate investigations.
In most cases, regulators join forces to condemn or fine a single institution or subset of a larger group. However, such numbers from the banks suggest that many American and British regulators are working together on a rare single settlement. Also unlike the Libor case, in this scenario, banks could collectively move past this matter in one fell swoop, avoiding drawn-out, inconsistent legal settlements.
Theme in Big Banks’ Latest Earnings-Legal Costs (PDF)