My first impression upon reading about another bank fine is surprise that these two words are not a bigger trending topic in social media. After more than seven years of watching headlines with the words “bank” and “fine,” I suspect readers’ eyes glaze over and move on to the latest, truly disruptive news. But the latest news on the bank-fine front caught my eye, and for good reason.
The Wall Street Journal reported this Monday that State Street Corporation is nearing a settlement with federal authorities and clients to end civil lawsuits originating from alleged infractions executing FX client trades between 1998 and 2009. The settlement figure being floated is “more than US$500 million.”
Here‘s our takeaway from this latest story:
- To our knowledge, this is the first time State Street Corporation had to pay an FX-related fine. State Street owns the FX Connect and Currenex platforms in addition to its own State Street bank FX business, and unbeknownst to many, is the second-largest name in FX markets behind Thomson Reuters, with average daily volume across all its platforms of more than US$200 billion. Furthermore, State Street’s custodian business is the second largest and safeguards more than US$27 trillion, while its asset management arm handles US$2.3 trillion of client assets.
- This settlement very likely began to gain momentum after Bank of New York Mellon Corporation, the largest global custodian, settled similar allegations of overcharging for FX transactions with US$714 million in March 2015. At more than US$500 million, the reported State Street settlement figure is quite considerable, though still below the US$1 billion (or higher) fees a handful of banks were handed out since 2012 as a result of London FIX or LIBOR fix rigging. Even so, it is well below the more than US$10 billion paid or due to be paid for various causes since 2009 by each of the following: Bank of America, JPMorgan Chase, Lloyds, RBS, Barclays, Citigroup, Deutsche Bank, HSBC, BNP Paribas, and UBS. Morgan Stanley analysts estimate that since 2009 these top banks have paid fines totaling US$227 billion and have yet to pay an estimated US$51 billion, representing one of the largest transfers of wealth from the private sector in recent history.
- This is a clear case of legal and operational fatigue that the parties could drag out for a few more years, should this settlement falter. The contracts that State Street had with its clients from the late 1990s gave the bank wide discretion in how to execute client FX trades, with instances of the bank overcharging clients or executing trades at times and prices that were most favorable to the bank. And yet, we presume that, given how those contracts were so loosely written in terms of what we now term “best execution,” authorities and banks were unable to get bigger monetary concessions from State Street or a rapid resolution from the legal process. Also, one can only imagine the fatigue and distraction that a large number of ongoing cases against State Street have on its considerable FX business, making the notion of a settlement attractive.
- FX best execution is now not only expected but required, particularly under MiFID II rules. But while the buy-side (even slow-moving real-money players) is now much more astute about FX execution matters than they were five years ago, there are still unresolved matters related to how to demonstrate best execution or how to achieve the lowest transaction cost. This is in no small part because the notion of having a true FX price benchmark in an OTC environment remains more a wish than a reality.
Our sense is that plenty of global regulators and justice departments will continue to try to endlessly milk fines out of the major banks involved in capital markets until it’s utterly apparent that banks are a radically different, smaller version of what they were pre-2007 and that most of them have lost interest in making markets or offering prime brokerage services. And these same progressive regulators/legislators also possess a major appetite for tinkering with (er ... fixing) capital markets in novel ways, such as financial transaction taxes, much higher collateralization levels, and ring fencing. The end result, we fear, will leave them backpedaling many of these reforms quickly in a few years as it becomes apparent that their actions have created different (more perverse?) forms of dysfunction.
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