The Manipulation Of The Foreign Exchange Lending Rate Forex

The manipulation of the foreign exchange lending rate forex


The highest fines ever have just been imposed on banks by regulators in the US and UK for dishonest manipulation of the foreign exchange index. This Forex scandal comes hot on the heels of the LIBOR scandal and interest rate hedging product misselling.

Forex scandal

The Financial Conduct Authority (FCA) has imposed a financial penalty of £284,432,000 on Barclays for failing to control business practices in its foreign exchange business in London.

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This is the largest financial penalty ever imposed by UK regulators. At the same time US regulators have fined Barclays $2.3bn, by far the largest fine imposed, because it did not settle with regulators last year.

Forex fixing scandal: Big banks fined $6 billion for manipulating foreign exchange rates

It is also reported that Barclays has admitted criminal charges relating to Forex manipulation.

"Put simply, Barclays employees helped rig the foreign exchange market," said Ben Lawsky, New York's superintendent of Financial Services. "They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients."

Essentially the banks colluded to share confidential information to fix benchmark foreign exchange rates.

The manipulation of the foreign exchange lending rate forex

As described in somewhat more neutral tones by the UK regulator, the FCA:

This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate at which it had bought that currency in the market to ensure a profit for Barclays.

Barclays’ control failings also meant that traders had the opportunity to benefit Barclays’ trading positions in FX options by attempting to manipulate fix or spot FX market rates to prevent Barclays’ clients from receiving pay-outs from the options they had purchased from Barclays.

In this way the banks could arrange trades before the FX rate became fixed to ensure that those foreign currency transactions were profitable for the bank – to the detriment of their customers.

It is a scheme with strong similarities to the LIBOR rigging scandal.

LIBOR scandal

In this, banks colluded to fix the London Inter-Bank Offered Rate of interest, and then arranged trades either side of the LIBOR rate, always to ensure that when the rate moved (whether up or down) their interest rate swap trades were profitable.

This scandal affected many parties with loans pegged to LIBOR, across the entire lending sector, even extending to mortgage borrowers. The rate of interest paid was being falsely manipulated for the banks’ own profits, yet because the LIBOR was rigged as much to bring it down as to raise it (any movement would do for the banks to make a turn) it can be difficult to show clear losses from that manipulation.

The manipulation of the foreign exchange lending rate forex

Borrowers in some circumstances may, perversely, have benefitted from rate dips as much as lost out from hikes.

Interest rate hedge misselling scandal

Forex has fewer similarities with the interest rate hedge misselling scandal.

Here the banks sold complex derivative products to all sorts of businesses, large and small; any business with a commercial loan.

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These were parties who did not know what a derivative was, but these ‘hedges’, designed to protect against interest rate swings, left borrowers stranded paying interest rates up to 5-8% when the Bank of England base rate fell to 0.5%. With no realistic ability to exit the swap/hedge, harm in these cases is clear to show.

The FCA imposed a scheme of redress covering smaller businesses. The irony that we have identified, though, through the work we have done in this arena is that the businesses most badly affected by these products have disappeared into insolvency.

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In these cases there is no entity left to benefit from the FCA scheme or pursue damages.


As to redress, with Forex, court action is underway in the US.

Large pension funds issued claims against the banks in late 2013.

The manipulation of the foreign exchange lending rate forex

It seems that there is likelihood of showing relevant duties of care and/or contractual breaches and loss in England too. Whilst it is expected that most claimants will be hedge funds and pension funds who had large sums invested in foreign currencies and were thus vulnerable to dishonest manipulation, there may also be corporates who had significant investments in foreign currency or who dealt in currency to manage exposure to currency fluctuations.

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They may also have suffered loss and the clear admissions of guilt by the banks may be the trigger that these parties have been waiting for.

With interest rate swaps and LIBOR compensation there was a test case, Graiseley, but that settled in April 2014.

This settlement will have frustrated many claimants who, too large to fall within the FCA redress scheme, were keen for a precedent to be set by that case for them to follow.

With these latest fines and, crucially, admissions we expect a rush to review all relevant transactions and a renewed vigour in the pursuit of redress across all forms of bank misbehaviour. Limitation needs to be considered and advice must be sought at the earliest opportunity.

About the author

Susan Hopcraft Partner

Susan advises on all aspects dispute resolution particularly in the financial services sector.

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She has extensive insurance, professional negligence and restrictive covenants experience. She deals with claims against solicitors, valuers, surveyors, brokers and accountants, fraud issues, recoveries for lenders and bank mis-selling.