Our firm is at the cutting edge of international litigation involving benchmark fixing and manipulation and has significant experience of developing and bringing claims arising out of the regulatory investigations (by the FCA and other regulators worldwide) in relation to manipulation of foreign exchange markets and rigging of benchmark rates.
Litigation deluge set to follow record forex fines: we are currently evaluating claims from investors worldwide against five of the world’s largest banks over allegations of forex fraud and foreign exchange market rigging, as they were found to have failed to control their forex business practices. These occurrences were not the result of an overnight trickery but a continual process between 1 January 2008 up until 15 October 2013
The latest fine of £2.6 billion was collectively issued by UK’s Financial Conduct Authority (FCA) along with two regulators of USA namely, Commodity Futures Trading Commission (CFTC) and Office of the Comptroller of the Currency (OCC). Further financial damage may be incurred if third parties that suffered losses due to rigged trades seek to make civil litigation claims against the banks involved.
Evidence of forex manipulation emerged in 2013 and has led to investigations by regulatory agencies and market-competition authorities worldwide. The UK is inevitably a main focus as it is the largest global centre for foreign exchange trading. Forex manipulation can have an important effect on forex derivatives that banks sold (mis-sold) to their customers.
The regulatory investigations into FX rates have focused on the abuse of the WM/Reuters rates, and specifically the London 4pm fix, as well as the 1.15pm European Central Bank (ECB) fix. Both daily benchmark rates are determined by the median rate of transactions in a 60 second window either side of 4pm and 1.15pm respectively and are widely used as pricing benchmarks and spot rates for other currency transactions.
The FCA and CFTC have found that traders at different banks shared confidential customer order information and trading positions, altered trading positions to accommodate banks’ collective interests, and agreed on trading strategies to attempt to manipulate certain FX benchmark rates. This included manipulating fix rates to trigger client ‘stop loss’ orders for the banks’ benefit; for example, where a bank sells currency to the client under the triggered stop loss order at a higher rate than it had been able to buy that currency, generating a profit for the bank (and potentially financial detriment for the client).
The creation of any peak or pit in the pegging cannot be made by individual orders as the traders adopted stealthy methods to collude and make bulk orders at the same time in order to achieve their ends by using private chat rooms and employing the use of confidential client information and market players. The banks failed to exercise proper control over their spot FX functions. Internal policies were high level in nature, oversight of spot FX traders’ conduct was insufficient and monitoring failed to identify traders’ conduct, including improper communications by traders and abuse of confidential client information. This allowed the banks’ spot FX businesses to act in the banks’ interests and without regard to the interests of market participants and clients.
The adverse findings in the FCA and CFTC will provide useful material in support of civil claims against the banks. Customers of banks involved who engaged in Forex transactions at the relevant benchmark rate found to be affected by manipulation may have claims, where the manipulation is established and can be shown to be financially detrimental to the customer. In practice, this might be most relevant to those regularly trading currencies in large volumes – for example, asset managers, pension funds and other significant investors – where substantial losses might arise over time from relatively small movements in the benchmark rates said to be due to manipulation. Alternatively, customers with products referencing the relevant FX benchmark rates affected may also have claims.
Claims against banks might include a variety of allegations and the legal basis for claims against banks guilty of forex manipulation are currently unclear; the following issues are being considered:
- Unjust enrichment – This potentially enables a customer to compel the bank to repay the profit that the bank has unjustly made.
- Breach of a best execution obligation – Some banks have best execution policies in place which may be that the bank will endeavour to get the best price for their client, by reference to express or implied terms, depending on the contractual framework in place,
- Breach of confidentiality – Traders disclosed the confidential information of their customers to other traders. For instance divulging to another trader that when the spot rate reached a certain figure, the client intended to sell or buy.
- Misrepresentation and conspiracy
- Rescission (cancellation) of the forex purchase agreement or the derivative – The allegation would be that the bank impliedly represented that it had not engaged in any false or misleading activity in relation to the fixing of the forex rate and that the customer would not have entered into the transaction with the bank had it been aware that the bank was manipulating the rate.
- Tortious claims for loss caused by unlawful means
Read our interview related to the Forex Manipulation claims on Treasury Today here