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EU fines banks billions for supporting forex cartels

Chris Hamblin, Editor, London, 3 June 2019

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In two settlement decisions, the European Union has fined five banks for taking part in two cartels in the Spot Foreign Exchange market for 11 currencies - the "three-way banana split" cartel and the "Forex-Essex express" cartel.

The first decision (the so-called “Forex-Three Way Banana Split” cartel) imposes a total fine of €811,197,000 on Barclays, The Royal Bank of Scotland (RBS), Citigroup and JPMorgan.

The second decision (the so-called “Forex-Essex express” cartel) imposes a total fine of €257,682,000 on Barclays, RBS and MUFG Bank (formerly the Bank of Tokyo-Mitsubishi).

The currencies in question were the euro, the Pound Sterling, the Japanese Yen, the Swiss Franc, the US Dollar, the Canadian Dollar, the New Zealand and Australian Dollars, and Danish, Swedish and Norwegian crowns. Foreign Exchange, or 'Forex,' refers to the trading of currencies.

UBS is an addressee of both decisions, but was not fined as it revealed the existence of the cartels to the Commission.

Margrethe Vestager, the unelected commissioner who frames the bloc's competition policy, said: “Companies and people depend on banks to exchange money to carry out transactions in foreign countries. Foreign exchange spot-trading activities are one of the largest markets in the world, worth billions of euros every day. The behaviour of these banks undermined the integrity of the sector at the expense of the European economy and consumers”.

When companies exchange large amounts of a certain currency against another, they usually do so through a Forex trader. The main customers of Forex traders include asset managers, pension funds, hedge funds, major companies and other banks.

Forex spot order transactions are meant to be executed on the same day at the prevailing exchange rate. The most liquid and traded currencies worldwide (five of which are used in the European Economic Area) are the Euro, British Pound, Japanese Yen, Swiss Franc, US, Canadian, New Zealand and Australian Dollars, and Danish, Swedish and Norwegian crowns.

The EU's investigation revealed that some individual traders in charge of Forex spot trading of these currencies on behalf of the relevant banks exchanged sensitive information and trading plans, and occasionally coordinated their trading strategies through various online professional chatrooms.

The commercially sensitive information exchanged in these chatrooms related to:

  • outstanding customers' orders (i.e. the amount that a client wanted to exchange and the specific currencies involved, as well as which client was involved in a transaction);
  • bid-ask spreads (i.e. prices) applicable to specific transactions;
  • their open risk positions (the currency they needed to sell or buy in order to convert their portfolios into their bank's currency); and
  • other details of current or planned trading activities.

Occasionally, these information exchanges also allowed the traders to spot opportunities for co-ordination, for example through a practice called “standing down” (whereby some traders refrained temporarily from trading activity to avoid interfering with another trader in the chatroom).

Most of the traders participating in the chatrooms knew each other personally. One chatroom was called "Essex Express ‘n the Jimmy" because all the traders but James lived in Essex and met on a train to London. The traders were direct competitors, but nonetheless logged in to multilateral chatrooms on Bloomberg terminals for the whole working day, and had extensive conversations about a variety of subjects, including recurring updates on their trading activities.

The "three-way banana split" infringement (2007-13) encompasses communications in three different, consecutive chatrooms among traders from UBS, Barclays, RBS, Citigroup and JPMorgan. The Essex Express infringement (2009-12) encompasses communications in two chatrooms among traders from UBS, Barclays, RBS and Bank of Tokyo-Mitsubishi (now MUFG Bank).

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