UBS bears brunt of forex rigging fines Matthew Allen, Swissinfo.ch

12.28.2014

Switzerland’s largest bank, UBS (NYSE:AG), has been handed combined fines of CHF783 million ($809 million) by regulators in Switzerland, Britain and the United States for allowing traders to manipulate foreign exchange benchmark rates.

UBS was forced to pay the highest price as five banks – also Citigroup, Royal Bank of Scotland, JP Morgan Chase and HSBC – were stung with fines totalling $3.2 billion (CHF3.1 billion) on Wednesday.

The banks were found guilty of allowing traders to collude together to rig benchmark rates that drive the $5.3 trillion-a-day global business. The Swiss Financial Market Supervisory Authority (FINMA) has also ordered action to be taken against 11 UBS traders.

Total forex rigging fines from Swiss, British & US regulators

Forex UBS

“Over an extended period of time the bank’s employees in Zurich at least attempted to manipulate foreign exchange benchmarks,” FINMA said in a statement.  “In addition, employees acted against the interests of their clients. Risk management, controls and compliance in foreign exchange trading were insufficient. By breaching control requirements and owing to the misconduct of its employees, UBS severely violated the requirements for proper business conduct.”

UBS attempted to mitigate its reputational damage by saying it was the first bank to alert the authorities to the problem. But FINMA boss Mark Branson, in a telephone conference with journalists, condemned the rigging as “the worst case of market manipulation that we have seen.”

UBS was ordered by FINMA to undertake measures to improve its internal compliance regime to ensure that such events are not repeated in future.

This includes restricting access of social media to traders following revelations that staff at different banks organised their improper activities via chatrooms with names such as “The Cartel”. Regulators gleaned evidence of wrongdoing by uncovering messages passed between traders via social media channels.

UBS had previously been ordered to improve its risk management and whistleblowing procedures and has now been told by FINMA to automate at least 95% of its forex transactions in future.

Bonus cutbacks

In addition, FINMA has ordered the bank to limit bonuses at the bank’s forex and precious metals trading desks to a maximum of 200% of basic pay. Traders had become used to receiving up to three times their salary in bonuses, a remuneration policy that has been blamed in part for fuelling their bad conduct.

FINMA will follow up this bonus limit by probing the validity of paying other investment bank executives more than 200% of their basic pay in annual bonuses.

In total, UBS was forced by FINMA to pay back CHF134 million in profits obtained by deception, and was slapped with a $290 million fines from the US Commodity Futures Trading Commission and £234 million from the British Financial Conduct Authority.

But UBS chief executive Sergio Ermotti said that the fines imposed on Wednesday were unlikely to be an end to the matter. “Today’s resolutions are an important step in our transformation process and towards closing this industry-wide matter for UBS. We continue to cooperate with related ongoing investigations,” he said in a statement.

Only weeks ago UBS put aside a further CHF1.86 billion in legal provisions to boost its total pot of cash covering future litigation to CHF3.47 billion. This suggests that the bank expects to pay a good deal more than CHF782 million to finally settle the case with the US Department of Justice (DoJ) yet to pronounce its penalty.

Clients likely to sue
Last month Citigroup analysts estimated that banks globally may be hit with up to $41 billion in fines relating to forex manipulation, with UBS tipped to shell out some CHF4.3 billion. In 2012 UBS was forced to pay fines totaling $1.5 billion to settle unrelated charges that traders manipulated Libor benchmark rates.

But Andreas Brun, analyst at Zurich Cantonal Bank, thinks these estimates will have to be revised down in the light of the British regulators imposing only $234 million.

“The fines announced today do not signal the end of the matter, it is just a first step,” Brun told swissinfo.ch. “The most expensive fines usually come from the DoJ, but I can’t see them charging twenty times more than the British regulator.”

In addition to regulatory penalties, all banks found guilty of offences will likely face civil lawsuits from angry clients who feel ripped off by trading activities. FINMA explicitly laid out the depth and range of behavior that damaged UBS’s own customers.

This included crediting some of clients’ trading profits to the bank, charging excessive mark-ups on transactions conducted on behalf of customers and bandying around confidential client data to third parties.

“The language in FINMA’s statement is unusually harsh,” Brun said. “The regulator sets down in quite some detail how some clients were badly treated. Civil lawsuits will follow, but these usually take between two to five years to come to fruition.”

FINMA also announced that it had ended probes into three other Swiss banks without the need to impose financial penalties. The banks have been ordered to tighten up their internal compliance systems.