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From Antitrust Law Daily, May 20, 2015

Five major banks will pay billions in benchmark rate rigging guilty plea

By Lene Powell, J.D.

In a sweeping series of settlements involving multiple regulatory agencies, a number of global banks have agreed to pay civil and criminal fines in connection with rigging key global benchmark rates. The Justice Department announced that five major banks pleaded guilty to conspiring to manipulate benchmark rates and will pay nearly $3 billion in fines. The resolutions feature parent-level guilty pleas, court-supervised probation, and record criminal fines, including the largest single fine for a violation of the Sherman Act.

Four banks pleaded guilty to criminal antitrust violations relating to the rigging of various foreign exchange (FX) benchmarks. One bank, UBS, pleaded guilty to manipulating LIBOR, a different benchmark rate, in breach of a non-prosecution agreement (NPA) it entered into in December 2012.

As part of the settlements, the Commodities Futures Trading Commission (CFTC) fined Barclays $515 million for attempted manipulation and false reporting involving both FX benchmarks and ISDAFIX, a global benchmark for interest rate products. Separately, the New York Department of Financial Services (NYDFS) announced that Barclays will pay $2.4 billion and terminate eight employees for conspiring to manipulate the spot FX market. In addition, the Federal Reserve announced $1.8 billion in fines against six banks for “unsafe and unsound practices” in the FX markets. The fines are among the largest ever assessed by the Federal Reserve.

"Today’s historic resolutions are the latest in our ongoing efforts to investigate and prosecute financial crimes, and they serve as a stark reminder that 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," said Attorney General Loretta E. Lynch.

FX market rigging. Between 2007 and 2013, euro-dollar traders at Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland plc used an exclusive, invitation-only chat room to coordinate their trading of U.S. dollars and euros to manipulate certain benchmark rates set at the 1:15 p.m. and 4:00 p.m. fixes, when trade data is collected and published.

Bill Baer, Assistant Attorney General in charge of Department of Justice, Antitrust Division, said the traders called themselves “The Cartel” and consisted of a senior trader and “a whole bunch of other traders” at each bank. The traders agreed to withhold bids or offers for euros or dollars to avoid moving the exchange rate in a direction unfavorable to open positions held by co-conspirators. By withholding supply of or demand for currency and suppressing competition in the FX market, they protected each other’s trading positions and profits.

NYDFS Superintendent Benjamin Lawsky described the scheme as “heads I win, tails you lose.” Traders used multiple strategies to coordinate their trading for mutual profit. In one strategy, called “building ammo,” 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. Traders also agreed to boycott local brokers to drive down competition. In one exchange in 2009 in the USD/Brazilian Real market, an RBC trader wrote, “Everybody is in agreement in not accepting a local player as a broker?” A Barclays trader responded, “Yes, the less competition the better.”

CFTC actions. The CFTC’s action for attempted manipulation and false reporting in the FX markets was only against Barclays, as the agency imposed almost $1.5 billion in fines against five banks in November 2014 for similar misconduct. The CFTC noted that the $400 million civil monetary penalty reflects that Barclays did not settle at an earlier stage of the investigation. The CFTC action also includes a separate $115 million fine against Barclays for attempting to manipulate USD ISDAFIX, a major benchmark for interest rate swaps and related derivatives, and is the first enforcement action addressing abuses of this benchmark.

UBS breach of NPA regarding LIBOR. As a result of UBS’s deceptive currency trading and sales practices as well as its collusive conduct in certain FX markets, the Justice Department determined that UBS violated its December 2012 non-prosecution agreement resolving the LIBOR investigation.

“If appropriate and proportional to the misconduct and the company’s track record, we will tear up an NPA or a DPA and prosecute the offending company,” said Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division.

Waivers. Asked whether the settlement negotiations had involved discussion of waivers, such as well-known seasoned issuer (WKSI) or “bad actor” waivers granted by the SEC, Attorney General Lynch declined to respond directly, saying that waivers are granted by the various regulatory agencies, not the DOJ.

“They have to deal with their regulators, who are numerous and varied,” said Lynch.

Sanctions. Citicorp, Barclays, JPMorgan, and RBS each agreed to plead guilty to a one-count felony charge of conspiring to fix prices and rig bids for U.S. dollars and euros exchanged in the FX spot market. The DOJ fines reflect the varied duration of the misconduct at each bank. Citicorp was involved for the longest period of time and will pay a fine of $925 million. Barclays will pay $650 million, JPMorgan will pay $550 million, and RBS will pay $395 million. In addition, two banks agreed to pay additional fines for breaching 2012 NPAs regarding LIBOR manipulation. Barclays agreed to pay an additional $60 million criminal penalty, and UBS agreed to pay a criminal penalty of $203 million.

The banks also agreed to three-year corporate probation. If approved by the court, the probation will be overseen by the court and require regular reporting to authorities as well as cessation of all criminal activity.

The Federal Reserve imposed fines of $342 million each for UBS AG, Barclays Bank PLC, Citigroup Inc., and JPMorgan Chase & Co.; $274 million for Royal Bank of Scotland PLC (RBS); and $205 million for Bank of America Corporation. The banks must also comply with certain undertakings.

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