By Lisa M. Goolik, J.D.
The Federal Reserve Board has fined HSBC Holdings plc, London, U.K., and HSBC North America Holdings Inc., New York, N.Y., $175 million for deficiencies in HSBC's supervision of foreign exchange (FX) traders. The Fed said the firm “fail[ed] to detect and address its traders misusing confidential customer information, as well as using electronic chatrooms to communicate with competitors about their trading positions.” The Fed also ordered HSBC to improve its controls and compliance risk management concerning the firm's FX trading.
Coordinated FX trading. In 2014, the Commodity Futures Trading Commission, along with the Office of the Comptroller of the Currency and other federal regulators, ordered five banks—including HSBC—to pay fines ranging from $275 million to $310 million each for trying to manipulate the global FX benchmark rates to benefit the positions of certain traders.
FX traders used private electronic chat rooms to coordinate their attempts to manipulate the FX benchmark rates for certain currency pairs, including the U.S. Dollar, Euro, and British Pound Sterling. They shared confidential customer order information and trading positions, changed trading positions to accommodate the interests of the collective group, and agreed on trading strategies as part of an effort by the group to attempt to manipulate certain FX benchmark rates. In some cases they pushed the rates downward, and in some cases upward.
HSBC traders charged. The Fed subsequently barred two former senior managers, Mark Johnson and Stuart Scott, from employment in the banking industry following their criminal indictment for wire fraud connection with their trading activities at HSBC. The individuals were charged with making multiple misrepresentations to an FX client of HSBC in connection with a large pre-arranged currency transaction. The OCC took similar action to bar Johnson from employment.
The Fed’s fine against HSBC addresses the firm’s deficient policies and procedures that prevented it from detecting and addressing unsafe and unsound conduct by its FX traders, including Johnson and Scott.
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