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The implications of 5 global banks receiving fines for currency trading collusion

Posted on Friday, May 31st, 2019 by MarketBeat Staff

The European Commission has taken a firm stance against collusion in the currency trading market, handing out a $1.2 billion fine to be spread across five global banks with employees involved in a foreign exchange cartel. Traders at Citigroup, Barclays, RBS, MUFG and JPMorgan Chase were found to be sharing sensitive information to gain an unfair advantage in the currency markets.

These traders used their privileged positions in these global banks to disseminate insider information within private online chat rooms. This trading cartel was known as the ‘Three Way Banana Split’. The collaboration helped these traders to gain a uniquely comprehensive picture of the world currency markets, thereby allowing them to buy and sell certain currencies at the most propitious moment. Given that the foreign exchange market is a multitrillion-dollar business, it is no surprise that these attempts to rig the market have attracted severe punishments.

UBS was also implicated in the collision, but the bank was exempt from fines because it was the first to notify the European Union of the scheme that occurred between 2007 and 2013. The other banks received considerable fines that reflected their dereliction of duty in failing to spot and stop the collusion (Citigroup €311m, RBS €249m, JPMorgan Chase €229m, Barclays €210m, MUFG €70m).

This collusion not only damaged the integrity of the banking system, but it also undermined the work of those who are making successful trades without the benefit of insider information. Trading on the foreign exchange market comes with a unique set of challenges, given the unpredictability of the markets. Many seek to combat that risk of volatility through hedging, a strategy in which traders take opposite directions on two linked currency pairs.

In theory, this strategy minimizes risk and maximizes probability. However, even hedging requires deep market research beforehand. A detailed overview by Forex experts Top Rated FX Brokers suggests that this analysis should comprise of four parts: assessing the risk, deciding a suitable risk tolerance threshold, choosing the most appropriate currency pairs, and closely observing the trade throughout the process. This collusion between banking heavyweights was a kick in the teeth for those who have learned to independently analyze market behavior.

The cartel operated across eleven currencies, including big hitters in the shape of the dollar, the euro, and the pound. Having so many global currencies means that consequently there are several currency pairs to be used, so it is no surprise that the scale of this collusion was truly worldwide. Again, this undermines the work of those who are able to predict currency trends purely through intelligent analysis. Many of the banks involved have since stated that they accept these punishments on the behalf of former rogue employees, declaring that steps have been made in the ensuing years to improve regulation. It is certainly not in the bank’s interests for such a scheme to ever develop again, hence the improved in-house control procedures.

However, investigations by the European Commission and other authorities will continue to uncover the full extent of any historical misdemeanors. This particular collusion scheme may also not yet be put to rest,with law firm Scott+Scott suggesting that this ruling from the Commission can open the door for those affected by the banks’ behavior to begin the process of suing. Banks have a huge and unavoidable responsibility to be a bastion of integrity. This case of collusion is not the only example of how that trust has been affected. American and British authorities have dished out fines of approximately $10 billion between seven of the world’s foremost banks for manipulating the currency markets.

Banks and traders alike will be eager for the discovery of this historical scandal to mark a turning point in the public perception of global banks. With so much at stake in the foreign exchange market, it is imperative that banks operate with absolute integrity. While historical transgressions may have occurred, authorities will be hopeful that banks are vigilantly following through on their promises to monitor and regulate the actions of employees.

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