NYDFS Announces Barclays To Pay $2.4 Billion, Terminate Employees For Conspiring To Manipulate Spot FX Trading Market

NYDFS Announces Barclays To Pay $2.4 Billion, Terminate Employees For Conspiring To Manipulate Spot FX Trading Market

Barclays Employee: “if you aint cheating, you aint trying”

Barclays FX Trader “[Y]es, the less competition the better”

NYDFS to Continue Its Investigation into Electronic FX Trading

Benjamin M. Lawsky, Superintendent of Financial Services, today announced that Barclays will pay $2.4 billion and is terminating eight additional Bank employees who engaged in misconduct for New York Banking Law violations in connection with its scheme to manipulate spot trading in the foreign exchange (FX) market. The overall $2.4 billion penalty Barclays will pay includes $485 million to the New York State Department of Financial Services (NYDFS), $400 million to the Commodities Futures Trading Commission (CFTC), $710 million to the U.S. Department of Justice (DOJ), $342 million to the Federal Reserve, and 284 million GBP (approximately $441 million) to the United Kingdom’s Financial Conduct Authority (FCA).

Today's NYDFS order concerning Barclays, however, does not release the Bank from any claims concerning electronic systems used in FX trading and electronic trading of FX and FX-related products. The Department will continue its investigation of these areas of activity.

Superintendent Lawsky said: “Put simply, Barclays employees helped rig the foreign exchange market. They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients. While today's action concerns misconduct in spot trading, there is additional work ahead. The Department's investigation of electronic foreign exchange trading – which makes up the vast majority of transactions in this market – will continue.”

Heads I Win, Tails You Lose FX Trading

A typical FX spot transaction involves the exchange of currencies at an agreed rate for settlement on a spot date—usually two business days from the trade date. In addition to trading directly in the market, clients can also submit “fix” orders to various large international banks, including Barclays, which then shoulder the risk of the trade and agree to deliver the requested currency to the client at the “fix” rate, which is determined at a subsequent time based on trading in the interdealer market.

Prior to a fix, clients place orders with banks (including Barclays) to buy or sell a specified amount of currency “at the fix rate”—i.e., the rate that would be determined at the upcoming fix. Traders with net orders to sell a certain currency at the fix rate make a profit if the average rate at which they buy the currency is lower than the fix rate at which they sell to their clients, while traders with net orders to buy a certain currency at the fix rate make a profit if the average rate at which they sell the currency is higher than the fix rate at which they buy from their clients.

Indeed, in a fair and functioning economic market, a business takes on risk in the hopes of earning a profit. However, Barclays’ traders coordinated with other banks to help remove that risk and instead just take profits at the expense of their clients. In other words, it was a “heads I win, tails you lose” trading system for Barclays.

From approximately 2008 through 2012, certain FX traders at Barclays communicated with FX traders at other banks to coordinate attempts to manipulate prices in certain FX currency pairs and certain FX benchmark rates, including the WM/R and ECB fixes.  The majority of these communications took place in multi-bank online chat rooms.

Certain FX traders at Barclays routinely participated in these multi-bank chat rooms and often had multiple chat rooms open at the same time. In their attempts to manipulate these benchmarks in the chat rooms, Barclays FX traders exchanged information about the size and direction of their orders with FX traders at other banks, as well as coordinated trading, and discussed the spread between bids and offers which the banks were showing to customers. The exchange of information among the traders at multiple banks via the use of chat rooms facilitated this type of conduct.

One particular chat room, referred to as the “Cartel” included FX traders from Citigroup, JP Morgan, UBS, RBS and Barclays who specialized in trading the Euro. Membership in this exclusive chat room was available by invitation only. Two Barclays EUR/USD traders were members of this chat room: one from December 2007 to July 2011 and another from December 2011 to August 2012. One Barclays FX trader, when he became the main Euro trader for Barclays in 2011, was desperate to be invited to join the Cartel because of the trading advantages from sharing information with the other main traders of the Euro. After extensive discussion of whether or not this trader “would add value” to the Cartel, he was invited to join for a “1 month trial,” but was advised “mess this up and sleep with one eye open at night.” This trader ultimately survived his “trial” and was permitted to remain in the Cartel chat room until it was disbanded at some point in 2012.

FX traders at Barclays employed various strategies in their efforts to manipulate the fixes. One method was known as “building ammo,” whereby a single trader would amass a large position in a currency and then unload the “ammo” just before or during the fix to try to move prices.

On January 6, 2012, one Barclays trader, who was also a Head of the FX Spot desk in London, attempted to manipulate the ECB fix by unloading EUR 500 million right at the fix time, stating in the Cartel chat room “i saved 500 for last second” and in another chat room “i had 500 to jam it."

Without the active cooperation and coordination among the traders at multiple banks, via the use of chat rooms, the Barclays trader would have had neither the information to indicate that pushing the price was feasible, since there were not large contrary orders pending, nor the tools to attempt to accomplish that forced, temporary push lower.

An additional tactic for reducing the risks involved in seeking to manipulate market prices was for the traders at the various banks on a multi-bank chat to agree to stay out of each other’s way around the time of a fix, and avoid executing contrary orders while an effort to push prices was being deployed. Traders would also cooperate with price manipulation efforts by seeking to “clear the decks” of contrary orders early, in order not to dilute the deployment of the full “ammo” nearer to the fix, as part of an effort to move prices beyond the narrower range that would be maintained by a more routine, even execution of orders.

For example, in a June 28, 2011 chat with a trader from HSBC, a Barclays trader reported that another trader was building orders to execute at the fix contrary to HSBC’s orders but Barclays assisted HSBC by executing trades ahead of the fix to decrease that other trader’s orders: “He paid me for 186 . . . so shioud have giot rid of main buyer for u.”

In another discussion on a multi-bank chat, on December 1, 2011, with a trader from Citigroup, a Barclays trader indicated “If u bigger. He will step out of the way. . . We gonna help u.”

FX traders involved in the USD/Brazilian Real market colluded together to manipulate markets in a more straightforward manner—by agreeing to boycott local brokers to drive down competition. On October 28, 2009, an RBC trader wrote “everybody is in agreement in not accepting a local player as a broker?” A Barclays FX trader responded “yes, the less competition the better.”

Additional Efforts to Cheat Barclays Clients

On numerous occasions, from at least 2008 to 2014, Barclays employees on the FX Sales team engaged in misleading sales practices with clients. Sales employees applied “hard mark-ups” to the prices that traders gave them without their clients’ knowledge. A hard mark-up represents the difference between the price the trader gives a salesperson and the price the salesperson shows to the client.

FX Sales employees would determine the appropriate mark-up by calculating the most advantageous rate for Barclays that did not cause the client to question whether executing the transaction with the Bank was a good idea, based on the relationship with the client, recent pricing history, client expectations and other factors.

As one FX Sales employee wrote in a chat to an employee at another bank on December 30, 2009, “hard mark up is key . . . but i was taught early . . . u dont have clients . . . u dont make money .  . . so dont be stupid.”

The practice of certain FX Sales Employees when a client called for a price quote was to mute the telephone line when asking the trader for a price, which would allow Sales employees to add mark-up without the client’s knowledge.

Mark-ups represented a key revenue source for Barclays and generating mark-ups was a high priority for Sales managers. As the future Co-Head of UK FX Hedge Fund Sales (who was then a Vice President in the New York Branch) wrote in a November 5, 2010 chat: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”

On June 26, 2009, after one FX Sales employee appeared to admit to another Sales employee that he “came clean” about charging a hard mark-up after a client called him out on it, the second employee stated “i wouldnt normally admit to clients if you pip them. i think saying you rounded is fine.” The first employee agreed, and replied that he didn’t actually come clean to the client, but rather “said i was rounding.”

On September 23, 2014, another FX Sales employee applied a mark-up to a client’s trade. The client called and asked if had applied a mark-up, and this Sales employee lied and said that he had not.

Another misleading sales practice was giving a client the worst (or a worse) rate that was reached during a particular time interval, even if the trader was able to execute the order at a better price. The more favorable fill generated a profit, which Barclays would keep, in whole or in part, without providing disclosure to the client.

A similar practice was to tell clients that their orders had been only partially filled, when in fact the FX Sales employees were holding back a portion of the fill as the market moved in Barclays’ favor, permitting Barclays to generate an undisclosed profit at the client’s expense.

Failures of Controls and Compliance

The misconduct at the Bank was systemic and involved various levels of employees, including a lack of appropriate supervision or intervention by certain managers both of FX trading desks and of FX Sales staff.

The culture within the Bank valued increased profits with little regard to the integrity of the market. In May 2012, after noting that “Large fixes are the key to making money as we have more chance of moving the market our way,” a Barclays senior trader announced an “added incentive” for Sales employees of 50% of profits made for increasing trading volume at certain fix orders.  In response, the head of the FX Spot desk in New York noted that “the ideas put forward in this mail are exactly what we are looking for.” The revenue produced by an FX trader’s trading activity impacted the compensation of FX traders, along with other factors.

During the relevant time period, although Barclays had general policies in place regarding trading and sales activity, those policies were not specifically designed for the FX business. The guidance Barclays did provide focused on insider trading risk and regulations that were not relevant to the foreign exchange market, which effectively left it up to individual traders to determine what kind of conduct was appropriate.

Warning signs alerted the Bank to weaknesses in its controls with respect to the FX business, but the Bank failed to take appropriate action. Although the Bank took steps, beginning in mid-2012, to address certain risks associated with the use of multi-bank chat rooms, it did not investigate the conduct that occurred in such chat rooms until mid-2013.

Specifically, in March 2012, Barclays discovered that an employee on the Sales desk had revealed, on one of his Reuters distribution lists, confidential information about an FX trade that had been executed by a Barclays client.

Barclays' initial response to this incident was to conduct a review that identified who had leaked the confidential information.  Thereafter, the Bank performed an additional review of the chats of only one trader who has now been identified as having engaged in some of the trading misconduct described in this Order. This additional review was assigned to a single Barclays employee in the Compliance division.

The Compliance employee who reviewed the chats looked only for confidential client information sharing, derogatory references to clients and bad language, but failed to discover any of the efforts to manipulate the benchmark rates described above.

In May 2012, the Bank held workshops with FX traders and FX sales personnel to discuss market color and confidential information sharing. At one of these workshops, traders discussed their efforts to coordinate the FX fixes. During and following these workshops, traders asked for guidance from the Compliance and Legal divisions about proper communications in the multi-bank chat rooms, but never received the requested guidance until October and December 2012.

Around the same time that certain FX traders raised concerns to Compliance about information sharing regarding and efforts to coordinate FX fixes in multi-bank chats, Barclays entered into a global settlement relating to the manipulation of other key benchmark rates, most notably the London Interbank Offered Rate (“LIBOR”). The LIBOR settlements took place on June 27, 2012.

Despite learning about FX traders’ information sharing in chat rooms at least as early as May 2012 while simultaneously entering into a settlement concerning persistent misconduct relating to the manipulation of key benchmark rates, which included misconduct by traders in chat rooms, Barclays did not shut down the use of interbank chat rooms by FX traders until October 2012 and by other lines of business until 2013.  Further, Barclays did not begin a full investigation of FX trading misconduct until the publication of a Bloomberg article in June 2013.

Employee Discipline

A number of Barclays employees that were involved in the wrongful conduct discussed in this Order, including a director on the FX Spot trading desk in London, a director on the FX Spot trading desk in New York, a director on the Emerging Markets desk in New York, a managing director in FX Hedge Fund Sales in New York, a director in FX Real Money Sales in New York, and an assistant vice president in FX Hedge Fund Sales in London, are no longer employed at the Bank.

As a result of the investigation, four Barclays employees have been terminated in the last month: the Global Head of FX Spot trading in London, an assistant vice president on the FX Spot trading desk in London, a director on the FX Spot trading desk in London and a director on the FX Spot trading desk in New York.

Certain employees involved in the wrongful conduct have been suspended or placed on paid leave but remain employed by the Bank. The Department orders the Bank to take all steps necessary to terminate the following four employees, who played a role in the misconduct discussed in this Consent Order but who remain employed by the Bank: a vice president on the Emerging Markets trading desk in New York, two directors on the FX Spot trading desk in New York and a director on the FX Sales desk in New York (who previously was Co-Head of UK FX Hedge Fund Sales in London).

To view a copy of today's NYDFS order regarding Barclays, please visit, link.


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