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Thursday, November 13, 2014

"free" markets aren't so free:

In ‘Cartell’ Chat Room Traders Boasted of Whacking FX Market (1)
2014-11-13 11:40:28.503 GMT

By Gavin Finch and Liam Vaughan
Nov. 13 (Bloomberg) -- In an early morning chat, three
senior currency traders at some of the world’s biggest banks
weighed the pros and cons of admitting a fourth member to their
private instant-message group.
The traders -- from Citigroup Inc., JPMorgan Chase & Co.
and UBS AG -- had worked together for years to manipulate the
$5.3 trillion-a-day currency market by sharing details of client
orders and coordinating trading strategies, two people with
knowledge of a global investigation into the foreign-exchange
market said last year. While adding a new recruit would bolster
their strength, they worried he couldn’t be trusted to put the
group’s interests ahead of his firm’s.
“Will he tell the rest of desk stuff,” Richard Usher,
JPMorgan’s chief London-based dealer, wrote in the chat
published yesterday by the U.S. Commodity Futures Trading
Commission. “Or god forbid his nyk,” he said, referring to the
New York trading desk.
“That’s the really imp[ortant] q[uestion],” replied
Citigroup’s London-based head of European spot trading, Rohan
Ramchandani. “Don’t want other numpty’s to know. Is he gonna
protect us like we protect each other.”
The undated conversation and hundreds of others form the
bedrock of investigations that yesterday saw regulators penalize
six banks, including Citigroup, JPMorgan and UBS, a record $4.3
billion for rigging foreign-exchange benchmarks. The transcripts
show traders boasting about “whacking” and “double teaming”
the market and congratulating one another when plans paid off.
The fines are the first wave of sanctions against banks and
could be followed by criminal charges.

Core Attack

“It was an attack at the core of what the markets are
about,” John McFall, a Labour member of the U.K. House of
Lords, said today. “It should be about transparency and serving
the public, and on both of those grounds it was rigged. You’re
talking about culture and change. It shows we haven’t seen that
The three traders at Citigroup, JPMorgan and UBS eventually
agreed to let the newcomer join because he would “add huge
value to this cartell,” one wrote. He was admitted for a month-
long trial and told “mess this up and sleep with one eye open
at night.”
While Usher and Ramchandani weren’t named in the document
released by the CFTC, their identities were confirmed by two
people with knowledge of the probes who asked not to be named
because some details of the settlement remain private. The other
traders couldn’t be identified. Ramchandani, who was fired by
Citigroup earlier this year, and Usher, who left JPMorgan after
being put on leave in 2013, declined to comment. They haven’t
been accused of wrongdoing by authorities.

3 Musketeers

The traders, and others at banks including HSBC Holdings
Plc and Royal Bank of Scotland Group Plc, would congregate in
chat rooms an hour or so before benchmark rates are set to
discuss their aggregate trading positions and how to execute
them to their mutual benefit, according to statements and
transcripts released yesterday by U.S., U.K. and Swiss
regulators. The groups dubbed themselves “the 3 musketeers,”
“1 team, 1 dream” and “the A-team,” Britain’s Financial
Conduct Authority said.
“The trader at the center of this investigation, very
disappointing behavior, very serious on his part,” JPMorgan’s
commercial bank chief Doug Petno said at a conference in New
York yesterday hosted by Bank of America Corp. “It’s a reminder
that the behaviors of a single individual define a company and
so it’s something that we’re super focused on as a business.”

‘The Oxygen’

A lawyer for Usher didn’t immediately respond to an e-mail
seeking comment on Petno’s remarks.
The fines arose from traders’ attempts to manipulate the
WM/Reuters currency benchmark, which is used to determine the
value of $3.6 trillion in index tracker funds around the world.
The rate, known as the fix, is set for more than 130 currencies
by taking a snapshot of trades in the 30 seconds before and
after 4 p.m. in London.
“Foreign exchange is the oxygen for international trade,”
Bill Michael, head of Europe, Middle East and Africa financial
services for KPMG LLP in London, said today. It’s “a betrayal
of the notion that banks will act in the best interest of the
From at least January 2008 through early 2012 traders
adopted an array of strategies to maximize their profits at the
fix, regulators said. If one of them had orders that ran counter
to the rest of the group, he would attempt to offload his
position with an unsuspecting counterpart at another bank to
avoid clashing with co-conspirators.

Traders’ ‘Ammo’

If the traders all had orders in the same direction, they
would seek to turbocharge any price moves. In the minutes before
the fix, they would attempt to sniff out any banks with large
orders in the other direction and trade with them in advance, a
process known in the market as “taking out the filth.” At
other times they would trade with third parties outside the chat
room with the intention of giving them orders in the same
direction to execute at the fix.
Sometimes they would transfer their orders, known as
“ammo,” in a particular currency pair to one trader, or divvy
up the orders between two traders who worked together to
maximize their impact on the fix, regulators said.
After establishing that they both had a lot of euros to
sell in exchange for dollars at the fix one day, Usher and
Ramchandani agreed to join forces, according to a transcript
published by the CFTC without a date. Usher, a former RBS
trader, was the moderator of the chat room known as “The
Cartel,” people with knowledge of the matter said in December.
Ramchandani joined Citigroup’s trading desk after graduating
from the University of Pennsylvania with a degree in economics.

‘Double Team’

“Tell you what, lets double team it. How much you got,”
Usher asked about eight minutes before that day’s fix.
“ok. 300. U?” his counterpart at Citigroup replied. “ok
ill give you 500 more,” said Usher.
Even colluding with one another was no guarantee traders
would succeed in moving the rate. The market moved against
Ramchandani and Usher that day, and they lost money, according
to the transcript. On other occasions they boasted of making
hundreds of thousands of dollars on a trade.
“The traders put their own interest ahead of their
customers, they manipulated the market -- or attempted to
manipulate the market -- and abused the trust of the public,”
FCA CEO Martin Wheatley told reporters at a briefing in London
yesterday, without identifying which traders he was talking
about. The regulator will press firms to review their bonus
plans and claw back payments already made.
The fines were the largest the British regulator has
imposed and mark the first time it has entered into a group bank

‘Murkier Side’

Some foreign-exchange traders became concerned that their
own communications could be problematic as their banks prepared
to settle with regulators over allegations of rigging another
benchmark, the London interbank offered rate, in 2012. In March
of that year, an unidentified JPMorgan trader asked the bank’s
compliance team what procedures they had in place about sharing
information in chat rooms with traders at other firms ahead of
the fix, the FCA’s settlement with the bank shows.
That same month Niall O’Riordan, UBS’s co-chief currency
dealer, called Bank of England official Martin Mallett to
discuss how banks communicated ahead of the fix to seek his
advice about whether the chats would raise concerns by
regulators, according to a report released yesterday by the
central bank. Mallett described the practices as “the murkier
side of our business” and raised the issue at a meeting of
senior foreign-exchange dealers in April 2012.
Mallett was dismissed Nov. 11 for “failure to adhere to
the bank’s internal policies,” not as a result of the
investigation, the BOE said.

Citigroup Fine

Citigroup, the world’s top currency dealer, was ordered to
pay the biggest fine at about $1.02 billion, according to
statements from the CFTC, FCA, the Swiss Financial Market
Supervisory Authority and the Office of Comptroller of the
Currency. JPMorgan will pay $1.01 billion, followed by UBS with
$800 million.
RBS was fined about $634 million, HSBC $618 million and
Bank of America $250 million. Barclays Plc, which had been
in settlement talks, said it wasn’t ready for a deal.
More than 30 dealers have been fired, suspended, put on
leave or resigned since the probes began last year. Banks are
overhauling how they trade currencies to regain the trust of
customers. They have capped what employees can charge for
exchanging currencies, limited dealers’ access to information
about customer orders and banned the use of online chat rooms,
people familiar with the moves said in September.
Despite the impact their behavior had on the value of
trillions of dollars of investments around the world, the
traders regularly congratulated each other for successfully
manipulating the market.
“Well done gents,” said one trader after one day’s fix,
according to the CFTC settlement document.
“Hooray nice team work,” a trader at another bank

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