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It's my cartel and I'll cry if I want to

Research by law firm Allen & Overy indicates that 2013 was a record year for fines awarded by anti-trust regulators, totalling US$4.2 billion up 10.5% from 2012’s US$3.8 billion, across Australia, Brazil, Canada, the EU, Japan, South Africa and the US. That would have been higher, were it not for several banks ‘fessing up and assisting the authorities with their investigations. UBS was released from a fine of €2.5 billion for assisting European authorities with investigations into the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), which yielded just €1.7 billion in fines from other financial services firms.

Sadly, the legal eagles expect 2014 to yield another bumper crop thanks to the activities of the financial fraternity; “We also expect the financial services sector to continue to command the spotlight in the coming year. New investigations into the financial services sector emerged in 2013 that will further unfold in 2014, with top US and EU officials warning that these latest investigations may be the most significant yet.”

So what can we expect in the year ahead?

In October 2013, UK regulator the Financial Conduct Authority announced an investigation into an alleged foreign exchange cartel, which was expected to take several months to complete. As London is the place where a good chunk of the US$4 trillion daily global FX transactions take place, this is significant. It has been suggested that the point at which foreign exchange benchmark rates are ‘fixed’ in London, at 4pm daily by WM Company, a division of US custodian bank State Street marks a dangerous point to trade.

As long ago as 2009, analysts were advising clients that best execution would not be achieved by trading at the 4pm fix, which is the benchmark that allows firms to compare their portfolios in-house and between firms. WM Company takes actual trading prices and order rates across a minute-long period around the point of the fix. The use of a median average to determine the benchmark allows firms to influence it by breaking trades into smaller pieces during that period, giving them a higher weighting.

There are no judgements in this so far, but the insight the case will offer into the ever opaque FX market is worth hanging around for. It was not long ago that custodian banks were in court facing pension fund clients in the US, for allegedly failing to represent client interests in FX.

In the New Year we will hear more stories from banks that have not yet settled in the various IBOR scandals, and there are judgements pending on various miss-selling scandals that are trundling on. Allen and Overy suggest that, “authorities will face serious questions about whether there is a better way to coordinate resolution of global enforcement matters to accomplish appropriate deterrence without tipping the balance toward over-punishment.”

As central banks printing money tapers off and sentiment is on the up, perhaps 2014 will be a year in which banks recover their reputations for lending money and prudence. However the idea that the fines are over-punishment, rather than ineffective punishment, once again reminds me that the system is not yet working in favour of ethical business.



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