Banks Manipulating Foreign Exchange Rates

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In early 2015, a nineteen month investigation by the United States government came to an end. There had been found sufficient evidence that five major banks- JP Morgan Chase & Co., Citigroup Inc., Barclays, Royal Bank of Scotland, and UBS AG- were guilty of knowingly manipulating and rigging benchmark interest rates in the foreign exchange market between December of 2007 and January of 2013.

All five banks, each one of the biggest foreign exchange traders in the world, have pleaded guilty and punishments and the banks are to pay fines that total to almost six billion dollars as this sample essay will discuss.

What did the banks to do manipulate the exchange rates

In the foreign exchange market, there are two big ‘fixes’, or certain times of the day, that are often used by buyers and sellers. The first is the 1:15pm fix, in which banks transact at 1:15pm UK time. Similarly, the 4pm fix occurs at 4pm UK time. The purpose of these fixes is to ensure that buyers and sellers know that their exchange rate is an accurate reflection of the market, instead of one set by the banks (Titcomb 2015).

When people are looking to buy or sell on the foreign exchange market, these are the times those transactions take place. Suppose the bank has a lot of customers who want to buy euros. At one of the fixed times, the banks will buy the euros from the market and hope that between the time they purchase them to the time they sell them to the customers, their purchase will have driven the price of euros upward. Thus, the banks have the opportunity to make money on the sale to the customer.

This kind of occurrence is considered to be okay; after all, businesses make their money by offering goods or services for less money than the business itself paid for it. The Financial Conduct Authority (FCA) acknowledges this as a legitimate practice that passes bank regulations.

“As part of legitimately risk management of client orders, you’re going to trade around the fix, and that’s going to affect the fix,” (Levine 2014).

Buying a large number of euros at a time will undeniably drive up the price of euros, and there is not anything wrong with that.

Though there is nothing illegal or unsavory about this practice, it is certainly not free of risks. If you were to buy a lot of euros, the price would only go up afterwards if no one else had any euros to sell during that time. The market could become saturated with euros at the same time you buy some, making the price you can sell them for go down instead of increase. This uncertainty makes buyers a bit more cautious, causing some to refrain from conducting large transactions.

The problem arose when banks attempted to remove this risk from their dealings. They did this by creating chat rooms in which they could disclose whether they were buyers or sellers. Knowing this eliminated the risk. If the group was predominately buyers, they would purchase many all at once and then slow down near the end of the fix in order to bump up the prices.

What did they banks do?

If the majority of the group was sellers, they would refrain from making purchases until the prices were at their lowest near the end of the fix before buying. In the case that the group was more evenly mixed, members of the group would determine beforehand which side dominated and the group would conduct business in a way that would make money for that side (Levine 2014). Banks had successfully eliminated all risk associated with trading on the foreign exchange market. In some instances, the inside banks were able to influence the worth of currency quite easily.

This sort of manipulation could invoke far-reaching consequences within the market and the global economy, in addition to its dangerous implications about the power of banks.

This is not a practice that many consider to be acceptable. Simply put, it is unsporting. Knowing what everyone else is doing removes any sort of risk, allowing the banks to push around the prices so that they can make money. They are secure knowing that they cannot lose money because they have efficiently rigged the system to work in their favor. Even if there are other banks transacting at the fix that are not in on the chatroom’s plan, those inside the group still have several options to further manipulate the situation to their favor.

If they cannot be sure whether these outside banks are buying or selling, they can buy from the outside banks so that the prices go up and the outside banks have less to sell, enabling the inside banks to sell the euros back at an increased price; they can refrain from making any transactions until the inside banks are on the only ones trying to buy or sell at the time; or they can sell all their euros to outside banks so that when the price goes down, they can rebuy their euros at the end of the fix from the outside banks at a decreased price (Levine 2014).

This is widely considered to be cheating. Knowing exactly what would happen in the chat rooms gave the inside banks an unfair advantage, as they could be comfortable trading inefficiently and manipulatively in order to skew the prices in their favor. Though their success was sometimes inconsistent, the practice is, beyond a doubt, corrupt and immoral. 

Dangerous implications

Though they were judged as guilty and received their punishments, the fact stands that banks were able to manipulate the worth of currency as they pleased. A few corporations and businesses should not have the ability to push around the value of money. This is not the first time this has happened, either. In 2012, there was an investigation into the London Interbank Offered Rate (Libor) in which it was revealed that several banks, such as Deutsche, Barclays, and the Royal Bank of Scotland, had been manipulating exchange rates since 2003.

Libor, though, is an interest-rate benchmark intended to reflect the rate of how much banks pay each other to borrow money, which is rather different from rigging the worth of currency, but there are some glaring similarities. Traders in the Libor scandal also used chatrooms to employ questionable business practices, in addition to severely manipulating the rates in the market, just like the foreign exchange market scandal.

The fact that the outcome of the Libor scandal established that there would be punishment for such manipulation and indiscretion makes the scandal on the foreign exchange market all the more troubling; it has been made clear that these kinds of practices are punishable and impermissible, and banks committed these misconducts anyway.

Two banks involved in the Libor scandal, Royal Bank of Scotland and Barclays, who ended up having to pay a two hundred million dollar settlement (McBride 2015), were also involved in the foreign exchange market scandal, despite having recently been punished for more or less the same transgression. The abuse of power and clear disregard for business ethics was more than troubling once the scandal broke.

Investigation into the manipulation

In early 2014, the United States government launched a nineteen-month-long investigation into whether or not foreign exchange traders were conspiring to manipulation currency rates for their own financial gain. During their investigation, government probes uncovered traders withholding their bids and offers in an effort to manipulate and control the foreign exchange rate.

Transcripts from the chatrooms used by the accused banks show their clear intention to manipulate the system. Traders made such comments as,

• “the less competition the better”
  
  
• “if you aint cheating, you aint trying”, and one trader at Barclays told a new member
  
  
• “mess this up and sleep with one eye open at night”

The investigation left no doubt that something illicit and unsavory, and impermissible, had occurred.

Punishments and fines

The case was vigorously and zealously pursued by United States Attorney General Loretta Lynch, who called the banks’ actions a “brazen display of collusion” (Johnson and McCoy 2015). Lynch maintained that these banks casually played around with a market that deals with over five trillion dollars a day and that influences, not just the UK or American economy, but virtually every economy in the world. Their actions affected innumerable consumers, businesses, and investors globally, and everything from the pension funds of chief corporations to the individual bank accounts of everyday customers. 

In a statement, Lynch said,

“this Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor, who subvert our marketplaces, and who enrich themselves at the expense of American consumers” .

Lynch aggressively attacked the banks in court and sought to prosecute them to the fullest extent of the law. Though specific charges have not been announced thus far, all of the banks were required to procure necessary waivers from the Securities and Exchange Commission to allow them permission to continue to operate business despite being convicted of criminal charges. This even affected the stock market, causing stocks for United States banks to fall, though only slightly, while the stock for European banks increased. 

Between the five banks charged, they were ordered to pay a combined almost six billion dollars. Barclays, who already had a dirty record in terms of market manipulation, was fined almost two and a half billion dollars. Citigroup Inc. paid the second highest fines, totaling a little more than one billion dollars less than Barclays. Next, J.P. Morgan & Chase Co. paid almost one billion dollars in fines and fees, followed by Royal Bank of Scotland, whose fees totaled almost seven hundred million dollars while UBS was commanded to pay slightly over five hundred million dollars.

Though these punishments have already been handed down, other regulators of global business are pursuing their own investigations while the United States government continues to pursue individuals for their role in the scandal. The banks have attempted to push the majority of the blame onto individuals and the small group of traders proven to be involved. Despite their claims that the actions of a few have been used to justify the punishment of the innocent, investigations against the banks for this scandal continue to develop.

Conclusion

This occurrence of a gross and unethical abuse of power should serve as both a reminder and a warning. This is not the first time such a thing has happened, and it is very unlikely to be the last, as several of the guilty parties were not first-time offenders. Though unfortunate, this situation can be used as a reminder and a warning of what can happen when large corporations attempt to control more than they should.

A small chatroom of bankers should not have the power to manipulate the worth of currency, and while they were eventually caught, they got away with committing the crime almost daily for six years. Luckily, the indiscretion was uncovered and the guilty parties were prosecuted and punished. Hopefully, this will be a lesson for the guilty parties involved that cheating and immoral business practices will not be tolerated.

Works Cited

Corkery, Michael, and Ben Protess. "Rigging of Foreign Exchange Market Makes Felons of Top Banks." The New York Times. The New York Times, 20 May 2015. Web. 30 May 2015.

Financial Conduct Authority. Rep. no. 124704. FCA, 2014. Web. 28 May 2015.

Levine, Matt. "Banks Manipulated Foreign Exchange in Ways You Can't Teach." Bloomberg View. Bloomberg L.P., 12 Nov. 2014. Web. 28 May 2015.

McBride, James. "Understanding the Libor Scandal." Council on Foreign Relations. Council on Foreign Relations, 21 May 2015. Web. 29 May 2015.

McCoy, Kevin, and Kevin Johnson. "5 Banks Guilty of Rate-rigging, Pay More than $5B." USA Today. Gannett, 20 May 2015. Web. 31 May 2015.

McLaughlin, David, Tom Schoenberg, and Gavin Finch. "Six Banks Pay $5.8 Billion, Five Guilty of Market Rigging." Bloomberg.com. Bloomberg, May 2015. Web. 31 May 2015.

Titcomb, James20. "Q&A: Why Are the Banks Being Fined for Foreign Exchange Rigging?" The Telegraph. Telegraph Media Group, 20 May 2015. Web. 29 May 2015.

Viswanatha, Aruna. "Banks to Pay $5.6 Billion in Probes." WSJ. The Wall Street Journal, 20 May 2015. Web. 30 May 2015.