Filling the Regulatory Void in the FX Spot Market: How Traders Rigged the Biggest Market in the World

C. Other U.S. Regulators 1. Monetary Authorities The monetary authorities for the United States are the Department of the Treasury and the Federal Reserve. The Department of the Treasury is mandated with setting U.S. exchange rate policy since the breakdown of the Bretton Woods system in 1971 and with setting international financial policy. Practically, it is the Federal Reserve Bank of New York that implements the Department of Treasury's exchange rate policies, and thus these decisions are often made in consultation with the Federal Reserve. (183) The U.S. Federal Reserve and the U.S. Treasury Department also pay close attention to FX markets and look for evidence of manipulation. (184) In connection to their roles in manipulating the foreign exchange rates, on May 20, 2015, the Federal Reserve imposed $1.8 billion in fines collectively against six banks (185) in conjunction with the Department of Justice for "unsafe and unsound practices in the foreign exchange markets. " (186) Along with the fines, the Federal Reserve issued cease and desist orders requiring each bank to improve their policies and oversight in the wholesale FX market. (187) The Federal Reserve required the banks "to improve senior management oversight, internal controls, risk management, internal audit policies, trading activities and procedures," and prohibits the reemployment of individuals involved in the manipulation scheme. (188) 2. U.S. Office of the Comptroller of the Currency On November 12, 2014, the U.S. Office of the Comptroller of the Currency (OCC) announced it would impose a total $950 million fine on three banks: Citibank, JPMorgan Chase, and Bank of America (189) for their role in unsound practices in the FX market. (190) The OCC found the banks lacked sufficient internal controls and failed to detect traders' improper business. After their investigation, the OCC determined: [T]he traders disclosed confidential bank information, including customer orders and rate spreads. The OCC's examinations also found that traders discussed activity to trigger trading actions potentially detrimental to customers and beneficial to the trader or bank, and discussed pending orders and agreed not to trade in particular currencies. (191) 3. New York Department of Financial Services On the same day the Department of Justice and Federal Reserve announced fines and criminal penalties in connection to FX market manipulation, the New York Department of Financial Services announced a fine against Barclays in connection with this same scheme for violations of New York Banking Law. (192) In its press release, the NYDFS added that it would continue to investigate Barclays' use of electronic FX trading. (193) On November 18, 2015, the NYDFS announced an additional $150 million fine for Barclays' use of its "Last Look" system (194) in FX trading. (195) The use of this electronic trading system would automatically reject any orders from the bank's customers that would not ultimately be profitable. (196) D. International Authorities The Heads of State and the Government of the Group of Twenty (G20) established the Financial Stability Board in 2009. (197) The international body of twenty countries seeks to review and promote international financial stability. (198) In response to concerns regarding the integrity of the FX markets, the Board has issued a report and set out a number of recommendations to reform the FX market and benchmark rates. (199) The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom, operating under the regulatory jurisdiction of the Financial Services Act of 2012. (200) Spot transactions are not deemed to fall under this Act as a qualifying investment, and therefore, FX spot transactions cannot apply to the market abuse regime under the FCA's Code of Market Conduct guidelines. (201) On November 12, 2014, the FCA announced they would impose a $1. …