In this article we take an in-depth look at the large fines that US regulators have levied against Paris-headquartered BNP Paribas to settle allegations of currency manipulation and misconduct on behalf of HNW and other investors in its foreign exchange business.

Traders at the bank have been accused of using online chatrooms while trading on behalf of HNW investors, pension funds and other customers to communicate with rival traders and fix benchmarks and prices. In May the New York Department of Financial Services fined BNP US$350 million and last month the Federal Reserve, the US federal banking regulator, fined the French bank $246 million to resolve investigations of its forex business.

BNP is no stranger to huge American fines. In June 2014 the Fed imposed a US$508 million penalty on it - the largest penalty it had ever assessed at the time - for breaking US sanctions laws. Indeed, according to the NYDFS, it hosted a widespread institutional effort to evade detection of more than $190 billion in transactions it conducted for clients who were subject to US economic sanctions between 2002 and 2012. Also according to the NYDFS, BNP Paribas (BNPP) has total AuM of more than €2.1 trillion (US$2.48 trillion). BNPP has striven to design an enterprise-wide compliance function since then and the independent monitor says that it has made good progress in some areas but there is still some way to go.

The DFS fine and remediation

New York's financial services superintendent was the first to settle with BNPP, claiming that it ran no less than a 'cartel' that manipulated forex rates, engaged in collusion, executed fake trades, co-ordinated trading to boost profits at the expense of clients, and shared confidential information about clients improperly between 2007 and 2013.

The consent order, of which US regulators sign perhaps 50 every year with financial firms by way of settlement, commits BNPP to a gruelling corrective regime. By contrast with many US regulatory settlements of the past, the bank has promised not to benefit from a tax deduction or tax credit with regard to the fine. BNP Paribas has had to dismiss nine traders and one salesman and has had to discipline certain other employees. It has agreed not to re-hire or retain any of the individuals proscribed by the regulator. It has promised to submit a written plan to the department to improve its senior managemers' oversight of its compliance with applicable New York State and federal laws and regulations, and applicable internal policies, in connection with its trading business and submit plans to improve internal FX controls, FX compliance risk management and FX audit, with time lines for full implementation and quarterly progress reports. Any tardiness will be "presumptive evidence of the bank's breach."

The NYDFS says that BNPP's misconduct (engaged in by more than a dozen BNPP traders and salespersons) happened because it failed to implement effective controls over its FX trading business. The miscreants maximised profits and minimised losses, usually to the detriment of BNPP customers and the customers of other banks that became involved in the misconduct. They tried improperly to do the following.

• Collusive conduct in on-line chat rooms that led to fake trades designed to manipulate prices and collusion in setting spreads for customers trading in certain currencies, in order to widen the spreads and artificially increase profits.
• Improper exchanges of information about past and impending 'customer trades' that aimed to maximise profits at customers' expense. They shared confidential information about customers improperly on personal emails and in some cases used a sophisticated codebook that helped them identify dozens of clients and specified trading volumes.
• Manipulation of the price at which daily benchmark rates were set. This involved both collusive market activity and improper submissions to benchmark-fixing bodies.
• The concealment of mark-ups on executed trades, done to mislead customers. This included the use of secretive hand signals when customers were on the phone and the deliberate 'underfilling' of 'customer trades' in order to keep part of a profitable trade for the bank's own book.

One BNPP salesperson based in Seoul in South Korea colluded with a counterpart at another global bank to co-ordinate bids secretly for a customer's business between April 2011 and November 2014 when responding to a certain customer's regular requests for competitive bids for a certain US dollar/Korean Won forward transaction. The salespeople at each bank agreed that one or the other of the banks would significantly overbid for the transaction by a certain amount. This permitted the bank that had not overbid to that extent to 'win' the bid with a nevertheless higher mark-up on the price, i.e. the 'winning' bank already knew through collusion that its so-called competitor's bid would be substantially higher. BNPP and the other global bank rigged at least 44 bids in this manner for the targeted customer, dividing the spoils evenly and charging the customer margins that were double the typical margins they had been able to charge before they hatched their scheme.

BNPP traders also harmed FX customers repeatedly by exchanging information in chat rooms with traders from other banks to trade advantageously against BNPP customers, adjusting prices in the light of additional information gleaned from putative competitors about the prices they offered such customers.
Typically, specific information about customers' identities and the types and sizes of their orders is considered confidential and proprietary to a bank and not to be shared outside. BNPP traders ignored this repeatedly for their own benefit.

We reign!

BNPP traders used other ingenious schemes to disadvantage customers. One BNPP FX trader located in Tokyo, known as trader 10, joined with seven other Japanese yen traders at various global banks and corporations to share information about customers improperly. The group regularly shared the identities and orders of specific customers for trading occurring in Tokyo, Hong Kong and Singapore, contradicting BNPP's confidentiality policies and threatening to depress competition in the FX markets.

Later, in 2012, 'trader 7' communicated with a 'trader 9' who worked at another global bank about a specific request from a client regarding an FX futures product, improperly divulging information about the prices that BNPP planned to offer with the words "don't make it too obvious that we talk." To work this elaborate scheme, the group periodically circulated a list of codes, usually involving one or two letters, punctuation marks or symbols that identified dozens of HNW clients and other market participants. The group also agreed upon a set of neutral-sounding words to represent specified trading volumes and named the chat room it used as the "We Reign" chat room.

To avoid detection, "We Reign" circulated the codebook, with periodic updates to give names to new participants or retire old ones, on its members' personal email addresses. For the revision of the codebook in March 2008, the group went through a one-week training period to learn the new codes. It buried code words or symbols in other words, thereby creating its own impenetrable grammar. This was designed to give an unsuspecting reader the impression that the coded communications were actually stray keystrokes, as one group member explained: "It might be con/using at first, but ... it will look more like a typo, also it will be much better than using stuff...which actually look like codes...[this way] we can protect ourselves."

The "We Reign" men often shared information about clients and trades improperly and in real time between 2007 and 2011. Examples abound. In October 2008, 'trader 10' told the group about certain trading activity that occurred "right before bought vsmall usdvchf" The term "vsmall" referred to a specific trade volume, while the letter "v" buried in the middle of the currency pair identified the BNPP client who traded. Trader 10 reminded the group: "please keep your lips sealed thx."

The Federal Reserve fine and remediation

The Fed's cease-and-desist order also calls for an internal controls and compliance plan of action, with a brief to evolve policies and procedures to ensure compliance for BNPP business lines that engage in "designated market activities," including US anti-trust (anti-monopoly) laws. It also calls for a clear identification of those activities; measures to ensure compliance by BNPP’s global business lines; clear reporting lines; clear management procedures, with an emphasis on accountability; transaction monitoring and communication surveillance that is commensurate with the risks inherent in the market; procedures to stop salesmen and traders misleading customers about the amount of mark-up/commission that BNPP charges for their orders or the ways in which it carries them out; a revised code of conduct for employees engaged in designated market activities; better procedures to let employees report infringements of BNPP's policies and/or regulatory rules; and periodic training.

Then there has to be a firm-wide compliance risk management plan of action with respect to "designated market activities," which the Fed defines elsewhere as 'covered' FX activities plus other trading and related sales activities in which the bank indulges that involve FX. There must also be an annual review of internal controls, conducted by people who have nothing to do with the business line, and an internal audit plan (called a 'programme,' a term with which all US regulators seem to have found favour). As with the NYDFS, there is a 90-day window in which the bank can submit its remediative plans for approval.

The federal banking regulator has fixated not only on the bank's use of chatrooms on electronic messaging platforms but also the deficient policies and procedures that allowed 'unsound' conduct on the FX traders' part. In the main it blames the bank for:

• disclosures of trading positions and discussions of coordinated trading strategies with traders of other institutions;
• discussions about anticipated FX benchmark fix-related trading and submissions with traders of other institutions;
• disclosures to traders at other institutions of confidential information about BNPP's customers;
• discussions regarding bid/offer spreads offered to FX customers with traders of other institutions; and
• discussions about trading that occurred in a manner likely to trigger off or defend certain FX barrier options (see below) at BNPP, in order to benefit BNPP.

The 'review period' behind this particular fine runs from June 2007 to October 2013. The Fed, like the NYDFS, has been most impressed by BNPP's co-operation with its efforts to put things right so far.

Barrier options

According to the Federal Reserve, many a BNPP trader sought to disadvantage a customer by triggering off, or defending, a barrier option that the customer had purchased.

One type of barrier option, known as a "knock-out," yields value to the purchaser only if the referred-to currency price does not reach a specified point in the market during a certain time period. If the market price touches or exceeds the barrier before the option expires, the option becomes worthless. It might be "knocked out," in which case BNPP profits because its obligation to make a payment to the customer disappears. BNPP also sold option barriers that worked the other way - sometimes it paid the customer only if the price reached or exceeded the barrier during the time period.

On several occasions, BNPP option traders enlisted colleagues at the bank to make large trades (transactions far in excess of any reasonable hedge) for the express purpose of manipulating the spot price to 'trigger' the barrier, i.e. cause the market price to touch the barrier during the relevant period. In July 2012, the head of BNPP's Asia options desk, 'trader 16,' asked the head of BNPP's spot FX desk in Tokyo, 'trader 17,' to help him drive the US dollar/Japanese yen currency pair above a certain price in order to "knock out" a customer's option. When trader 17 asked "how much can u throw at it[?]," trader 16 replied that he had "200mio ofammo" available to manipulate the price higher.

In the seconds leading up to the expiration of the option, trader 16 told trader 17 to "buy a bit more if necessary," as the spot price had not moved far enough to knock out the customer's option. Although trader 17 made a flurry of dollar purchases in the seconds leading up to the option's expiration, successfully maneuvering the spot price to approach the barrier, their co-ordinated efforts to affect the price of the currency pair ultimately failed. With an eye to the future, trader 17 noted: "[next time] we'll try [to] really concentrate the lot at the last moment to be able to keep [the spot price} above until time is over."

Additionally, in December 2012, a New York BNPP options trader called 'trader 18' discussed strategies regarding a customer's Australian dollar/US dollar option with a London BNPP trader, 'trader 19.' Trader 18 reported that his conversations with colleagues in New York had led him to believe that a certain amount of spot trading "should push [the market] 5 tics," so "u may want to speak to those guys there [London spot traders]," because if the underlying spot price were to drift close to the barrier, it would be worth trying to push it over. Trader 19 subsequently noted: "I told the spotter we may want to trigger it if getting close [to the barrier]." After the spot price rose high enough to "knock out" the customer's option, the traders in New York and London congratulated one another on the trigger with such messages as "nice work on triggering the barrier."