The Financial Conduct Authority (FCA) has imposed a financial penalty of £284,432,000 on Barclays Bank Plc (Barclays) for failing to control business practices in its foreign exchange (FX) business in London. This is the largest financial penalty ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA).
Barclays’ failure adequately to control its FX business is particularly serious in light of its potential impact on the systemically important spot FX market. The failings occurred throughout Barclays’ London voice trading FX business, extending beyond G10 spot FX trading into EM spot FX trading, options and sales, undermining confidence in the UK financial system and putting its integrity at risk.
Georgina Philippou, the FCA’s acting director of enforcement and market oversight said:
"This is another example of a firm allowing unacceptable practices to flourish on the trading floor. Instead of addressing the obvious risks associated with its business Barclays allowed a culture to develop which put the firm’s interests ahead of those of its clients and which undermined the reputation and integrity of the UK financial system. Firms should scrutinise their own systems and cultures to ensure that they make good on their promises to deliver change."
Between 1 January 2008 and 15 October 2013, Barclays’ systems and controls over its FX business were inadequate. These failings gave traders in those businesses the opportunity to engage in behaviours that put Barclays’ interests ahead of those of its clients, other market participants and the wider UK financial system. These behaviours included inappropriately sharing information about clients’ activities and attempting to manipulate spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.
Barclays and other firms are already participating in an industry-wide remediation programme to ensure that they address the root causes of the failings in their FX businesses and that they drive up standards. As part of the remediation programme, senior management at Barclays and the other firms must take responsibility for delivering the necessary changes.
Barclays’ failings
Barclays’ controls over its FX business were inadequate and ineffective. It primarily relied on its front office FX business to identify, assess and manage the relevant risks – however the front office failed to pick up on obvious risks associated with confidentiality, conflicts of interest and trader conduct.
Some of those responsible for front office management were aware of and/or at times involved in this misconduct, reflecting a failure to embed the right values and culture in Barclays’ FX business. Barclays’ control and risk functions failed to challenge effectively the management of these risks in the FX business.
Barclays engaged in collusive behaviour in which traders from different banks, including Barclays, formed tight knit groups and communicated through electronic messaging systems including chat rooms. Certain groups described themselves or were described by others using phrases such as “the players” – one chat room participant referred to himself and others in the chat room as “the 3 musketeers” and commented “we all die together”.
The information obtained through these groups helped traders determine their trading strategies. They then attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements).
This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate at which it had bought that currency in the market to ensure a profit for Barclays.
Barclays’ control failings also meant that traders had the opportunity to benefit Barclays’ trading positions in FX options by attempting to manipulate fix or spot FX market rates to prevent Barclays’ clients from receiving pay-outs from the options they had purchased from Barclays.
The FCA also found examples of inappropriate sharing of confidential information by spot FX traders and sales staff, including sharing client identities and information about client orders. Disclosing these details gave other market participants more information about the activity of Barclays’ clients than they would otherwise have had, creating significant potential for client detriment.
The failings in Barclays’ FX business persisted despite similar control failings in relation to Libor and the Gold fixing, which were the subject of previous FSA and FCA enforcement actions. Although Barclays made some improvements following these enforcement actions, it failed to take adequate steps to address the underlying root causes of the failings in its FX business.
The financial penalty
Barclays settled at stage two of the FCA’s investigation, qualifying for a 20% discount – without this, the FCA would have imposed a financial penalty of £355,540,000.
We have worked closely with other regulators in the US on this case including the Commodities Futures Trading Commission (CFTC), the Federal Reserve Bank of New York, the New York State Department of Financial Services (NYDFS), and the U.S. Department of Justice (DOJ).
Barclays was open and cooperative with the FCA during this investigation and has committed significant resources to improving its business practices and associated controls.
Notes to editors
- The Final Notice for Barclays Bank Plc[1] and a summary of the FX market and example of attempted manipulation at Barclays Bank Plc[2].
- The FX market is one of the largest and most liquid markets in the world with a daily average turnover of $5.3 trillion, 40% of which takes place in London. The spot FX market is a wholesale financial market and spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies. Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk. An FX option gives the buyer the right, but not the obligation, to buy or sell a set amount of currency at a specified rate on or before an agreed date. Certain types of options may only be activated or deactivated if the currency pair in question trades at a particular rate in the market. Option providers are exposed to movements in the spot FX rate for the duration of the option, and will typically buy or sell that currency pair in the market in order to manage this risk. Firms can legitimately make a profit or loss by managing the risk arising from client orders through associated trading. However, attempts to manipulate spot FX benchmarks or intraday rates are wholly unacceptable. Although spot FX trading was unregulated during the period under investigation, the importance of firms managing risks associated with their FX businesses through effective systems and controls is widely recognised in industry codes. All regulated firms must identify, assess and manage the risks that their businesses pose across the markets they operate in and preserve market integrity, whether or not those markets are regulated.
- The final notice and final notices for enforcement cases against Barclays in relation to Libor and the Gold[3] fixing. This is the largest financial penalty ever imposed by the FCA or FSA and is the 15th imposed on firms for benchmark misconduct[4] of which six, including this case, related to FX.
- FCA penalties imposed on other firms for FX failings on 12 November 2014[5]: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million).
- Spot FX describes the exchange of two currencies (a currency pair), where the price (exchange rate) is agreed today and ownership is transferred shortly thereafter (usually two business days from the trade date).
- The G10 currencies are US dollar, Euro, Japanese yen, British pound, Swiss franc, Australian dollar, New Zealand dollar, Canadian dollar, Norwegian krone and Swedish krona.
- During the relevant period the 4pm WM Reuters fix was calculated by reference to trading activity on particular electronic broking platforms during a one minute window (or “fix period”) 30 seconds before and 30 seconds after 4pm.
- The ECB fix is based on information exchanged between different central banks each day and is based on trading activity on an electronic broking platform at the time of the fix. This kind of fix is described as a “flash” fix – a fix that reflects an exchange rate at that particular moment in time.
- Examples of relevant industry codes include the Non-Investment Products Code and the ACI Model Code[6].
- The FCA is already acting to drive up standards across the industry, with a broad supervisory remediation programme for firms and specific reviews of how effectively firms reduce the risk of traders manipulating benchmarks and ensure confidential information is not abused.
- In addition, the FCA was given powers to regulate the 4pm WM Reuters benchmark from 1 April 2015. Attempted or actual manipulation of any regulated benchmark is now a criminal offence, which could attract a prison sentence of up to seven years.
- In April 2014, the FCA announced[7] it would review how effectively:
- firms reduce the risk of traders manipulating benchmarks;
- firms ensure confidential information they receive in one part of the business is not used by another business area in an abusive way; and
- firms control conflicts of interest that can exist between obligations to clients and sales and the trading positions they take.
- We are also reviewing firms’ compliance with regulations on Libor, the London Interbank Offer Rate, which were introduced in April 2013 following a number of enforcement actions against firms for attempted manipulation of this key interest rate benchmark.
- The FCA plays a leading role in developing internationally agreed regulatory standards on benchmarks. We are actively engaged in supporting EU regulation on benchmarks and chair work on benchmarks by the International Organisation of Securities Regulators (IOSCO). The IOSCO Benchmark Task Force has reviewed how effectively these standards have been applied to key benchmarks in 2014. We also co-chaired the FSB work on reforms to interest rate benchmarks, following the introduction of our regulations on Libor.
- The Fair and Effective Markets Review (FEMR), led by the Bank of England, was established by the Chancellor in June 2014 to conduct a comprehensive and forward-looking assessment of the way wholesale financial markets operate. The FCA co-chairs this work the HM Treasury.
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- You can find more information about the FCA[8], as well as how it is different to the PRA[9].