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Get Up to Speed with Market Manipulation – the FX Scandal Lloyd Maynard

Get Up to Speed with Market Manipulation – the FX Scandal Lloyd Maynard. The ForEx Market. ForEx: an unregulated market that ‘ follows the sun. ’ The London Fix: 15:59 and 30 seconds to 16:00 and 30 seconds

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Get Up to Speed with Market Manipulation – the FX Scandal Lloyd Maynard

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  1. Get Up to Speed with Market Manipulation – the FX Scandal Lloyd Maynard

  2. The ForEx Market • ForEx: an unregulated market that ‘follows the sun.’ • The London Fix: 15:59 and 30 seconds to 16:00 and 30 seconds • Used by banks, international equity portfolio managers, multinationals, central banks • An interbank market that runs on a credit-approved system

  3. Something about oranges • DAY 1 • DAY 2 • DAY 3 • DAY 4

  4. Manipulating ForEx: Front-running • 15:45 pension fund order sell £250m in exchange for euros at the Fix. £1 = €1.4000. • 15:50 trader sells £250m of bank’s sterling at €1.3995. BANK CUSTOMER €349,875,000 £250,000,000

  5. Manipulating ForEx: Front-running • At Fix: sterling sell orders flood in, sterling weakened exchange rate £1 = €1.3975. • Trader re-purchases his sterling for €1.3975. €500,000profit: 15:50: £250m x €1.3995 = €349,875,000 received 16:00:£250m x €1.3975 = €349,375,000 spent €500,000 £250,000,000 €349,375,000

  6. Manipulating ForEx Banging the close • 15:45: trader receives client order to sell €1bn for Swiss francs, at Fix price. • 15:59 and 30 seconds: trader sells his bank’s euros (€1bn if possible), driving the price down. • 16:00 and 10 seconds: trader purchases his client’s euros at the lower FIX price. • Profit: difference in starting FX rate verses median Fix rate – 0.02% = 200,000 Swiss franc profit

  7. Manipulating ForEx: where is the illegality? • Front-running and banging the close are not illegal • Insider trading • Oranges day 5: Stop Loss Orders • http://www.fca.org.uk/news/fca-fines-five-banks-for-fx-failings

  8. FCA Fines Principle 3 “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.” PRIN 3.2.3R(1) – principle 3 applies when regulated firms are undertaking unregulated activity. PRIN 3.1.1R – principle 3 applies wherever a firm undertakes regulated activity

  9. FCA Fines 1 January 2008 – 15 October 2013 Tougher regulation? Software/claw-backs/pay reform/prosecution/culture shock?

  10. ForEx Manipulation: the losers? • You? • Pension and Hedge Funds • Multinational companies • Central banks • The Bank of England • Bank employees

  11. ForEx claims: misrepresentation • Graiseley Properties and Unitech Global[2013] EWCA Civ 1372 • Offer alone sufficient conduct: restaurant customer – [28] • Fraud unravels all (disclaimers redundant) – [29] • Representations as to other bank’s conduct weaker but arguable – [31]

  12. ForEx claims: misrepresentation • An honestly obtained rate? • Proving detriment may prove difficult: • Will the FCA publish evidence of rate manipulation? • Damages in lieu of rescission • Limitation

  13. ForEx claims: breach of confidence • Seager v Copydex Ltd[1967] 2 All ER 415 at 417: • “The law on this subject does not depend on any implied contract. It depends on the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consent.”

  14. Questions and AnswersLloyd MaynardLMaynard@forumchambers.com

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