The European Commission Fines Banks for Participating in a Forex Cartel
Introduction
The European Commission began investigating the collusive behavior of Credit Suisse,[1] UBS,[2] Barclays,[3] RBS,[4] and HSBC[5] in the Foreign Exchange (forex) spot trading market in 2019.[6] With the recent press release dated 02.12.2021, the Commission announced that the case is now closed.
As a result of the case, a total of €261 million in fines were imposed on the three banks (Barclays, RBS and HSBC) that decided to settle, while Credit Suisse was fined €83 million under the ordinary procedure as they decided not to settle. UBS acted as the whistleblower and exposed the cartel, thus avoiding any fines.
This was the sixth cartel investigation conducted by the Commission in the financial sector since 2013,[7] and is the final link in the chain of forex investigations. These investigations show that the Commission has the financial markets in its focus and tends to scrutinize the collusive behavior between banks. The details disclosed by the Commission will be examined below.
Scope of the Investigation
The Commission’s investigation concerned trading of the G10 currencies,[8] which comprise the most liquid and traded currencies worldwide. When companies exchange large amounts of different currencies, 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.
Throughout the investigation process, it was revealed that some traders in charge of the forex spot trading of G10 currencies, acting on behalf of the fined banks, exchanged sensitive information and trading plans, and occasionally coordinated their trading strategies through an online professional chatroom called Sterling Lads. In other words, employees of different banks conveyed future-facing strategic information with each other in online chat rooms.
Information exchanges between competitors are typically assessed as concerted practices under article 101(1) TFEU (the Treaty on the Functioning of the European Union). Concerted practices are a looser form of coordination not requiring the establishment of a binding agreement. That being said, information exchanges of individualized future prices and/or quantities are normally treated as hardcore cartels pursuant to article 101(1)(a) of the TFEU, which expressly prohibits restrictions on competition that “directly or indirectly fix purchase or selling prices or any other trading conditions.” The more strategic the data (i.e., the more it reduces uncertainty in the market), the more likely it is the Commission will find it restricts competition.
According to the Commission, the information exchanges in this particular case enabled the traders to make informed market decisions on whether and when to sell or buy the currencies they had in their portfolios, as opposed to a situation where traders acting independently from each other take an inherent risk in taking these decisions. In addition, occasionally these information exchanges also allowed the traders to identify opportunities for coordination, for example through a practice called “standing down,” whereby some of them would temporarily refrain from trading to avoid interfering with another trader. This allowed the investigated banks to forgo competitive behavior. In turn, this harmed the banks’ customers as they faced higher rates and less transparency.
The Outcome
The Commission’s investigation started with an immunity application under the Commission’s Leniency Notice submitted by UBS, which was followed by applications for reduction of fines by the other parties. Thus, UBS escaped a €94 million fine under the Commission’s leniency provisions for having revealed the existence of the cartel. The settling parties, Barclays, RBS and HSBC, also earned a 10% reduction in fines.
Since Credit Suisse did not cooperate under the leniency or settlement procedures, it did not benefit from any reductions granted within those frameworks.
As a result, Barclays was fined €54.4 million, RBS was fined €32.5 million, HSBC was fined 174.3 million and Credit Suisse was fined €83.3 million.
In addition, the investigation revealed the existence of three separate infringements concerning the forex market, two of which were simultaneously examined in this particular case and concluded in 2019 when all the relevant parties settled the case. The other two cases were:
- The Three Way Banana Split forex settlement decision concerned communications in three different, consecutive chatrooms (entitled “Three-way banana split / Two and a half men / Only Marge”) among traders from UBS, Barclays, RBS, Citigroup and JPMorgan. The infringement started on 18 December 2007 and ended on 31 January 2013. UBS was granted immunity and the other parties all settled the case and received reduced fines.
- The Essex Express forex settlement decision concerned communications in two chatrooms (entitled “Essex Express ‘n the Jimmy” and “Semi Grumpy Old men”) among traders from UBS, Barclays, RBS and Bank of Tokyo-Mitsubishi (now MUFG Bank). The infringement started on 14 December 2009 and ended on 31 July 2012. UBS, as the applicant, did not receive any fines and the other parties received reduced fines after their settlement.
Conclusion
On multiple occasions, Commissioner Margrethe Vestager has claimed that foreign exchange spot trading activities are one of the largest financial markets in the world, and emphasized that the collusive behavior of the five investigated banks regarding on-spot trading undermined the integrity of the financial sector at the expense of the European economy and consumers. With this third fine imposed on the banks within the last few years, the Commission indeed demonstrated that they will show zero tolerance to collusive behavior and anti-competitive activities of the banks that eliminate the uncertainty in the market. Furthermore, the banks may now face follow-on damage claims by third parties that were harmed by the cartel, which would result in additional financial consequences for them. Needless to say, this will put additional pressure on the banks.
All in all, considering the severity of the Commission’s findings in this case, financial organizations and banks should pay extra attention to competition law sensitivities in their activities and make sure their employees – the traders – refrain from attending high-risk conversations in online chat rooms.
[1] Credit Suisse Group AG
[2] UBS Group AG
[3] Barclays Plc
[4] Royal Bank of Scotland Group Plc
[5] HSBC Holdings Plc
[6] Case AT.40135
[7] Other cases included the Euribor/Euro interest rates derivatives case - CASE AT.39914, the Yen interest rates derivatives case - CASE AT.39861, Swiss Franc interest rates derivatives case – CASE AT.39924, SSA bonds case – CASE AT.40346 and EGB bonds case – CASE AT.40324.
[8] Australian dollar (AUD), Canadian dollar (CAD), Euro (EUR), Japanese yen (JPY), New Zealand dollar (NZD),
Norwegian krone (NOK), Pound sterling (GBP), Swedish krona (SEK), Swiss franc (CHF), United States dollar (USD)
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