Final Notice
FINAL NOTICE
1.
ACTION
1.1.
For the reasons given in this Notice, the Authority hereby imposes on
JPMorgan Chase Bank N.A. ("JPMorgan") a financial penalty of
£222,166,000.
1.2.
JPMorgan agreed to settle at an early stage of the Authority’s
investigation. JPMorgan therefore qualified for a 30% (Stage 1)
discount under the Authority’s executive settlement procedures.
Were it not for this discount, the Authority would have imposed a
financial penalty of £317,380,000 on JPMorgan.
2.
SUMMARY OF REASONS
2.1.
The foreign exchange market (“FX market”) is one of the largest and
most liquid markets in the world.1 Its integrity is of central
importance to the UK and global financial systems. Over a period of
five years, JPMorgan failed properly to control its London voice
trading operations in the G10 spot FX market, with the result that
traders in this part of its business were able to behave in a manner
that put JPMorgan’s interests ahead of the interests of its clients,
other market participants and the wider UK financial system.
2.2.
The Authority expects firms to identify, assess and manage
appropriately the risks that their business poses to the markets in
which they operate and to preserve market integrity, irrespective of
whether or not those markets are regulated. The Authority also
expects firms to promote a culture which requires their staff to have
regard to the impact of their behaviour on clients, other participants
in those markets and the financial markets as a whole.
2.3.
JPMorgan’s failure adequately to control its London voice trading
operations in the G10 spot FX market is extremely serious. The
importance of this market and its widespread use by market
participants throughout the financial system means that misconduct
relating to it has potentially damaging and far-reaching consequences
for the G10 spot FX market and financial markets generally. The
failings described in this Notice undermine confidence in the UK
financial system and put its integrity at risk.
2.4.
JPMorgan breached Principle 3 of the Authority’s Principles for
Businesses in the period from 1 January 2008 to 15 October 2013
(“the Relevant Period”) by failing to take reasonable care to organise
and control its affairs responsibly and effectively with adequate risk
management systems in relation to G10 spot FX voice trading in
London. References in this Notice to JPMorgan’s G10 spot FX trading
business refer to its relevant voice trading desk based in London.
2.5.
During the Relevant Period, JPMorgan did not exercise adequate and
effective control over its G10 spot FX trading business. JPMorgan
1 The daily average volume turnover of the global FX market was over USD5 trillion in April
2013 according to the Bank for International Settlements (BIS) Triennial Central Bank Survey
2013.
relied primarily upon its front office FX business to identify, assess
and manage risks arising in that business. The front office failed
adequately to discharge these responsibilities with regard to obvious
risks associated with confidentiality, conflicts of interest and trading
conduct. The right values and culture were not sufficiently embedded
in JPMorgan’s G10 spot FX trading business, which resulted in it
acting in JPMorgan’s own interests as described in this Notice without
proper regard for the interests of its clients, other market participants
or the wider UK financial system. The lack of proper control by
JPMorgan over the activities of its G10 spot FX traders in London
undermined market integrity and meant that misconduct went
undetected for a number of years. JPMorgan’s control and risk
functions failed to challenge effectively the management of these
risks in the G10 spot FX trading business.
2.6.
JPMorgan’s failings in this regard allowed the following behaviours to
occur in its G10 spot FX trading business:
(1)
Attempts to manipulate the WMR and the ECB fix rates, alone
or in collusion with traders at other firms, for JPMorgan’s own
benefit and to the potential detriment of certain of its clients
and/or other market participants;
(2)
Attempts to trigger clients’ stop loss orders for JPMorgan’s
own benefit and to the potential detriment of those clients
and/or other market participants; and
(3)
Inappropriate sharing of confidential information with traders
at other firms, including specific client identities and, as part
of (1) and (2) above, information about clients’ orders.
2.7.
These failings occurred in circumstances where certain of those
responsible for managing front office matters were aware of and/or
at times involved in behaviours described above. They also occurred
despite the fact that risks around confidentiality were highlighted
when, in March 2012, London FX front office requested guidance from
JPMorgan Compliance regarding information sharing with other banks
ahead of fixes.
2.8.
JPMorgan was aware during the Relevant Period of misconduct
associated with LIBOR / EURIBOR, which was identified in well-
publicised Final Notices issued against other firms from June 2012
onwards. JPMorgan was not subject to enforcement action by the
FCA for LIBOR / EURIBOR misconduct during the Relevant Period. It
nonetheless engaged in a remediation programme across its
businesses in response to these Notices. This included policy
enhancements regarding submissions-based benchmarks. Despite
these improvements, the steps taken during the Relevant Period in
its G10 spot FX business did not adequately address the root causes
that gave rise to failings described in this Notice.
2.9.
The Authority therefore imposes a financial penalty on JPMorgan in
the amount of £222,166,000 pursuant to section 206 of the Act.
2.10. The
Authority
acknowledges
the
significant
co-operation
and
assistance
provided
by
JPMorgan
during
the
course
of
its
investigation. JPMorgan is continuing to undertake remedial action
and has committed significant resources to improving the business
practices and associated controls relating to its FX operations. The
Authority recognises the work already undertaken by JPMorgan in
this regard.
2.11. This Notice relates solely to JPMorgan’s conduct in its G10 spot FX
trading business in London. It makes no criticism of any entities
other than the firms engaged in misconduct as described in this
Notice.
3.
DEFINITIONS
3.1.
The definitions below are used in this Final Notice.
“the Act” means the Financial Services and Markets Act 2000
“the Authority” means the body corporate previously known as the
Financial Services Authority and renamed on 1 April 2013 as the
“the BoE” means the Bank of England
“the BIS survey” means the Bank for International Settlements (BIS)
“CDSG” means the BoE’s Chief Dealers’ Sub-Group
“clients” means persons to whom a firm provides G10 spot FX voice
trading services
“EBS” means the Electronic Brokerage Service, an electronic broking
platform
“ECB” means the European Central Bank
“1:15pm ECB fix” or “ECB fix” is the exchange rate for various spot
FX currency pairs as determined by the ECB as at 1:15pm UK time
“EURIBOR” means the Euro Interbank Offered Rate
“firms” means authorised persons as defined in section 31 of the Act
“FX” means foreign exchange
“G10 currencies” means the following currencies:
USD
US dollar
JPY
Japanese yen
GBP
British pound
CHF
Swiss franc
AUD
Australian dollar
NZD
New Zealand dollar
CAD
Canadian dollar
NOK
Norwegian krone
SEK
Swedish krona
“LIBOR” means the London Interbank Offered Rate
“the ACI Model Code” means the Model Code issued by the ACI – the
Financial Markets Association, as applicable during the Relevant
“net client orders” has the meaning given to that term at paragraph
3.2 of Annex B to this Notice
“the NIPS Code” means the Non-Investment Products Code, as
applicable during the Relevant Period
“the Principles” means the Authority’s Principles for Businesses
“Reuters” means the Reuters Dealing 3000, an electronic broking
platform operated by Thomson Reuters
“the Relevant Period” means 1 January 2008 to 15 October 2013
“spot FX” has the meaning given to that term in paragraph 4.3 of this
Notice
“the spot FX rate” means the current exchange rate at which a
currency pair can be bought or sold
“the Tribunal” means the Upper Tribunal (Tax and Chancery
Chamber)
“the UK financial system” means the financial system operating in the
United
Kingdom,
including
financial
markets
and
exchanges,
regulated activities and other activities connected with financial
markets and exchanges
“4pm WM Reuters fix” or “WMR fix” is the exchange rate for various
spot FX currency pairs determined by WM Reuters as at 4pm UK time
4.
FACTS AND MATTERS
Relevant background
The FX market
4.1.
The FX market, in which participants are able to buy, sell, exchange
and speculate on currencies, is one of the largest financial markets in
the world. Participants in the FX market include banks, commercial
companies, central banks, investment management firms, hedge
funds and retail investors.
4.2.
The most significant currencies traded in the FX market are G10
currencies in terms of turnover and their widespread use within
global financial markets. According to the BIS survey, almost 75% of
all global FX trading in April 2013 was conducted in G10 currency
pairs, with a daily average turnover of almost USD4 trillion. The top
currencies by daily volume of FX trading in April 2013 were US dollar,
Euro, Japanese yen and British pound, with the largest turnover in
EUR/USD, USD/JPY and GBP/USD currency pairs.
4.3.
The FX market includes transactions involving the exchange of
currencies between two parties at an agreed rate for settlement on a
7
spot date (usually two business days from the trade date) (“spot
FX”). Benchmarks set in the spot FX market, especially in G10
currency pairs, are used throughout the world to establish the
relative values of different currencies and are of crucial importance in
worldwide financial markets. In particular, benchmarks such as the
4pm WM Reuters and 1:15pm ECB fixes are used in the valuation and
performance management of investment portfolios held by pension
funds and asset managers both in the UK and globally. The rates
established at these fixes are also used as reference rates in financial
derivatives.
4.4.
A fuller description of the spot FX market and the background
matters described below is set out in Annex B to this Notice.
The 4pm WM Reuters fix and the 1:15pm ECB fix
4.5.
Two of the most widely referenced spot FX benchmarks are the 4pm
WM Reuters fix and the 1:15pm ECB fix, which are each used to
determine benchmark rates for various currency pairs. For G10
currency pairs, these fixes are based upon spot FX trading activity by
market participants at or around the times of the respective 4pm WM
Reuters or 1:15pm ECB fixes.
Fix orders
4.6.
Prior to a fix, clients often place orders with a firm to buy or sell a
specified volume of currency “at the fix rate”. This is a reference to
the rate that will be determined at a forthcoming fix and the firm
agrees to transact with clients at that rate.
4.7.
By agreeing to transact with clients at a fix rate that is yet to be
determined, the firm is exposed to rate movements at the fix. A firm
will typically buy or sell currency in order to manage this risk, for
example by trading in the market or “netting off” (e.g. where a firm
has a buying interest for the fix and trades with a market participant
which has a selling interest for the fix).
4.8.
A firm with net client orders to buy currency at the fix rate will make
a profit if the average rate at which the firm buys the currency in the
market is lower than the fix rate at which it sells to its clients.
Similarly, a firm with net client orders to sell currency at the fix rate
will make a profit if the average rate at which it sells the currency in
the market is higher than the fix rate at which it buys from its clients.
4.9.
A firm legitimately managing the risk arising from its net client orders
at the fix rate may make a profit or loss from its associated trading in
the market. Such trading can, however, potentially influence the fix
rate. For example, a firm buying a large volume of currency in the
market just before or during the fix may cause the fix rate to move
higher. This gives rise to a potential conflict of interest between a
firm and its clients. It also creates a potential incentive for a firm to
seek to manipulate the fix rate to its benefit and to the potential
detriment of certain of its clients. For example, there is a risk that a
firm with net client orders to buy a particular currency at the fix rate
might deliberately trade in a manner designed to manipulate the fix
rate higher. This trading could result in a profit for the firm as
described above, but may result in certain clients paying a higher fix
rate than they would otherwise have had to pay.
Fix Orders – The Bank of England
4.10. The Bank of England (the “BoE”) through its membership of the Chief
Dealers’ Sub-Group (“CDSG”)2 was made aware during the Relevant
Period of firms using electronic messaging services, such as chat
rooms, to discuss their net orders ahead of fixes and the practice of
netting off between them. For the avoidance of doubt, the Authority
does not consider that the netting off of orders ahead of fixes is
inappropriate in all circumstances. The Authority has concluded that
the fact that netting off was discussed by the CDSG does not affect
the liability of the firms. Each firm was responsible for ensuring that
it had appropriate systems and controls to manage the risks
associated with these practices. The BoE has conducted its own
investigation into the role of its officials in relation to certain conduct
issues in the FX market which is being published separately.3
Stop loss orders
4.11. Clients place stop loss orders with a firm to help manage their risk
arising from movements in currency rates in the spot FX market. By
accepting these orders, the firm agrees to transact with the client at
2 The CDSG is a sub-group of the London Foreign Exchange Joint Standing Committee
established under the auspices of the BoE. Its membership is drawn from a selection of chief
dealers active in the London FX market and is chaired by a representative of the BoE.
3 The terms of reference of which are available at:
http://www.bankofengland.co.uk/publications/Pages/news/2014/052.aspx
or around a specified rate if the currency trades at that rate in the
market. No binding agreement is made until the agreed rate has
been “triggered” (i.e. when the currency trades at that rate in the
market).
4.12. By agreeing to transact with a client at or around the specified rate,
the firm is exposed to movements in the spot FX rate. A firm will
typically buy or sell currency in the market in order to manage this
risk. This trading can result in a profit or a loss for the firm. For
example, a client’s stop loss order to buy currency can result in a
profit for the firm if the average rate at which the firm buys the
currency in the market is lower than the rate at which it sells the
currency to the client pursuant to the stop loss order.
4.13. A firm legitimately managing the risk arising from a client’s stop loss
order may profit from the trading associated with its risk
management. There is, however, a potential incentive for a firm to
manipulate the spot FX rate in order to execute stop loss orders for
the firm’s benefit and to the potential detriment of its client. For
example, a firm with a client stop loss order to buy a particular
currency might deliberately trade in a manner designed to
manipulate the spot FX rate higher in order to trigger the client’s
order at the specified rate. This could result in the firm making a
profit as described above. The client could be disadvantaged,
however, since the transaction may not have happened at that time
or at all but for the firm’s actions.
Electronic messaging via chat rooms or similar
4.14. It was common practice during most of the Relevant Period for G10
spot FX traders at firms to use electronic messaging services, such as
chat rooms, to communicate with traders at other firms. Whilst such
communications are not of themselves inappropriate, the frequent
and significant flow of information between traders at different firms
increases the potential risk of traders engaging in collusive activity
and sharing, amongst other things, confidential information. It is
therefore especially important that firms exercise appropriate control
and monitoring of such communications.
Spot FX operations at JPMorgan
4.15. JPMorgan is a wholly owned subsidiary of J.P. Morgan Chase & Co.
(“the Group”). JPMorgan is a full service bank, headquartered in the
U.S., with operations in retail, wholesale and investment banking as
well as treasury and securities services.
4.16. Throughout the Relevant Period, the Group’s UK spot FX business
was conducted out of London via JPMorgan. JPMorgan also conducted
G10 spot FX trading out of New York, Tokyo and Sydney. According
to the Euromoney4 FX Survey 2013, JPMorgan was listed in the top
seven firms in terms of market share in global FX trading in spot and
forwards.
4.17. JPMorgan operates a “three lines of defence” model to manage risk.
JPMorgan’s front office business lines (the first line of defence) had
primary responsibility for identification of conduct risks, which they
were expected to report to Compliance officers for escalation via
relevant business control committees. In addition, the business line
and compliance functions participated in regular risk assessments,
which could also result in escalation of issues for remedial work by
Compliance or Risk (the second line of defence) or Internal Audit (the
third line of defence).
The failures of systems and controls at JPMorgan
4.18. In accordance with Principle 3, JPMorgan was under an obligation to
identify, assess and manage appropriately the risks associated with
its G10 spot FX trading business, given the potentially very significant
impact of misconduct in that business on G10 fix benchmarks, the
spot FX market generally and the wider UK financial system.
JPMorgan failed to do so adequately during the Relevant Period in
relation to risks associated with confidentiality, conflicts of interest
and trading conduct in its G10 spot FX trading business in London.
4.19. There are no detailed requirements for systems and controls
concerning spot FX trading in the Authority’s Handbook. The
importance of firms implementing effective systems and controls to
manage risks associated with their spot FX businesses was
4 Euromoney is an English-language monthly magazine focused on business and finance. First
published in 1969, it covers global banking, macroeconomics and capital markets, including
debt and equity.
nonetheless recognised within the market, as evidenced by a number
of industry codes published from time to time from 1975 onwards.
4.20. The
codes
applicable
during
the
Relevant
Period
expressly
recognised:
(1)
That manipulative practices by firms constituted “unacceptable
trading behaviour” in the FX market;5
(2)
The need for FX trading management to “prohibit the
deliberate exploitation of electronic dealing systems to
generate artificial price behaviour”;6
(3)
The need for firms to manage the conflict of interest between
a firm handling client orders and trading for its own account so
as to ensure that “customers’ interests are not exploited” and
“the fair treatment of counterparties”;7
(4)
The importance of firms requiring standards that “strive for
best execution for the customer” when managing client
orders;8 and
(5)
The fundamental importance of preserving the confidentiality
of client information as “essential for the preservation of a
reputable and efficient market place”.9
4.21. The key provisions of these codes relevant to the matters in this
Notice are reproduced in Annex C.
Failure adequately to identify, assess and manage risks in JPMorgan’s
G10 spot FX trading business
4.22. JPMorgan failed to identify properly or take adequate steps to assess
the risks described in this Notice associated with its G10 spot FX
trading business, and to manage them effectively during the Relevant
Period.
4.23. JPMorgan’s G10 spot FX trading business involved traders receiving
confidential information regarding, amongst other things, the size
and direction of its clients’ fix orders and the size, direction and level
of other client orders, including stop loss orders. Whilst receipt and
5 Paragraph 1 of Annex C
6 Paragraph 1 of Annex C
7 Paragraph 1 and 2.1 of Annex C
8 Paragraph 1 of Annex C
9 Paragraph 2.1 of Annex C
use of such information for risk management purposes can be
legitimate, there is a risk that the information could be improperly
used by those traders to trade for JPMorgan’s benefit and to the
disadvantage of certain of its clients. If disclosed by JPMorgan to
traders at other firms, it could also enable those traders improperly
to take advantage of this information for their firms’ benefit and to
the potential detriment of certain of JPMorgan’s clients, acting either
alone or in collusion with G10 spot FX traders at JPMorgan. This gave
rise to obvious risks in JPMorgan’s G10 spot FX trading business
concerning conflicts of interest, confidentiality and trading conduct.
These risks were exacerbated by the widespread use by JPMorgan’s
G10 spot FX traders of chat rooms to communicate with traders at
other firms.
4.24. Pursuant to its three lines of defence model, JPMorgan’s front office
had primary responsibility for identifying, assessing and managing
the risks associated with its G10 spot FX trading business. The front
office failed adequately to discharge these responsibilities with regard
to the risks described in this Notice. The right values and culture
were not sufficiently embedded in JPMorgan's G10 spot FX trading
business, which resulted in it acting in JPMorgan's own interests as
described in this Notice, without proper regard for the interests of its
clients, other market participants or the wider UK financial system.
The lack of proper controls by JPMorgan over the activities of its G10
spot FX traders meant that misconduct went undetected for a
number of years. Certain of those responsible for managing front
office matters were aware of and/or at times involved in the
misconduct.
4.25. Whilst JPMorgan had policies in place regarding risks of the type
described in this Notice, they were high-level in nature and applied
generally across a number of JPMorgan’s business divisions. There
were no policies specific to FX and the guidance provided in the
business-wide policies did not address the practical issues that
traders in JPMorgan’s G10 spot FX trading business faced on a daily
basis. JPMorgan did not have any policies applicable to its G10 spot
FX trading business specifically regarding the use by traders of chat
rooms or similar electronic messaging services during the Relevant
Period. JPMorgan allowed its traders to participate in multi-bank chat
rooms throughout the Relevant Period.
4.26. JPMorgan failed to take adequate steps to ensure that general
policies concerning confidentiality, conflicts of interest and trading
conduct were effectively implemented in its G10 spot FX trading
business. There was insufficient training and guidance on how these
policies should be applied specifically to that business. JPMorgan
recognised this towards the end of 2011, and implemented FX-
specific training in March 2012 as a result. This training prompted
requests from the front office for specific guidance from Compliance.
JPMorgan also rolled-out new firm-wide anti-trust training to London-
based FX staff in September 2012. However, the new training
contained few practical examples about the application of JPMorgan’s
policies and inadequate guidance on what amounted to unacceptable
behaviour by G10 spot FX traders. The absence of adequate training
and guidance about the application of JPMorgan’s general policies to
its G10 spot FX trading business increased the risk that misconduct
would occur.
4.27. JPMorgan’s day-to-day oversight of its G10 spot FX traders’ conduct
was insufficient. There was inadequate supervision by JPMorgan of
those
traders’
conduct
and
use
of
chat
rooms
or
similar
communications during the Relevant Period. None of the systems and
controls in JPMorgan’s FX business were adequate to detect and
prevent the behaviours described in this Notice.
4.28. JPMorgan’s second and third lines of defence failed to challenge
effectively the management of these risks by JPMorgan’s front office.
During the Relevant Period, JPMorgan did not conduct monitoring of
chat rooms in which London traders participated, except for the
purposes of anti-money laundering and wall-crossing concerns. This
monitoring failed to identify the behaviours described in this Notice.
4.29. JPMorgan had certain G10 spot FX trade monitoring in place in
London during the Relevant Period, which was not designed to
identify the trading behaviours described in this Notice.
4.30. JPMorgan’s failure to identify, assess and manage these risks
appropriately is especially serious given that:
(1)
Certain of those responsible for managing front office matters
were aware of and/or at times involved in behaviours
described in this Notice.
(2)
JPMorgan was aware during the Relevant Period of misconduct
associated with LIBOR / EURIBOR. The Authority published a
Final Notice against another firm in relation to LIBOR /
EURIBOR in June 2012. This, and other similar Notices
published subsequently, highlighted, amongst other things,
significant failings in the management and control of traders’
activities by other firms’ front office businesses. These
included failing to address or adequately control conflicts of
interest around benchmarks, inappropriate communications
and other misconduct involving collusion between traders at
different firms aimed at inappropriately influencing LIBOR /
EURIBOR. The control failings at these other firms had led to a
poor culture in the front office lacking appropriate ethical
standards and resulted in an ineffective first line of defence.
They allowed trader misconduct around LIBOR / EURIBOR at
these other firms to occur undetected over a number of years.
(3)
In response to the above, JPMorgan undertook a review to
assess whether issues could arise for JPMorgan in relation to
similar benchmarks and indices (not including the 1:15pm ECB
or 4pm WM Reuters fixes), including an inventory project to
identify LIBOR-like submissions and to consider whether
JPMorgan should continue to contribute to, or participate in,
those submissions and, if so, to review and enhance relevant
policies
and
procedures
where
necessary.
JPMorgan
implemented enhanced policies and new training and guidance
for submitters and traders in order to better ensure
independence and reliability in the benchmark setting process.
(4)
Despite these improvements, JPMorgan failed to address fully
in its G10 spot FX trading business the root causes that gave
rise to failings described in this Notice. For example, the risks
around conflicts of interest in that business were not
addressed by JPMorgan. As a result, JPMorgan did not
appropriately mitigate the risks of potential trader misconduct
in its G10 spot FX trading business.
(5)
Risks around confidentiality in JPMorgan’s G10 spot FX trading
business were highlighted in March 2012, when JPMorgan
Compliance was asked for guidance about information sharing
with other banks in chat rooms ahead of fixes. While
Compliance replied with appropriate advice by email, there is
no record of wider dissemination of the guidance or of steps to
ensure this was reflected in JPMorgan’s policies or controls.
(6)
In addition, in April 2012 Compliance requested that the front
office provide it with a list of "do's and don'ts" for trading at a
fix, in order to assist with creating guidance in that regard. No
such guidance was produced. However, general firm-wide
anti-trust training was provided to London G10 spot FX traders
in September 2012, as noted in paragraph 4.26 above.
Inappropriate trading behaviour and misuse of confidential
information
4.31. JPMorgan’s failure to identify, assess and manage appropriately the
risks in its G10 spot FX trading business allowed the following
behaviours to occur in that business:
(1)
Attempts to manipulate the WMR and the ECB fix rates, alone
or in collusion with traders at other firms, for JPMorgan’s own
benefit and to the potential detriment of certain of its clients
and/or other market participants;
(2)
Attempts to trigger clients’ stop loss orders for JPMorgan’s
own benefit and to the potential detriment of those clients
and/or other market participants; and
(3)
Inappropriate sharing of confidential information with traders
at other firms, including specific client identities and, as part
of (1) and (2) above, information about clients’ orders.
4.32. These behaviours were typically facilitated by means of G10 spot FX
traders at different firms communicating via electronic messaging
services (including chat rooms). These traders formed close, tight-
knit groups or one-to-one relationships based upon mutual benefit
and often with a focus on particular currency pairs. Entry into some
of these groups or relationships and the chat rooms used by them
was closely controlled by the participants. Certain groups described
themselves or were described by others using phrases such as “A-
team” or similar.
4.33. The value of the information exchanged between the traders and the
importance of keeping it confidential between recipients was clear to
participants. In one group, a JPMorgan trader questioned whether a
prospective new participant would “tell [the] rest of [his] desk stuff”.
A trader at another firm commented “dont want other numpty’s in
mkt to know [about information exchanged within the group], but not
only that is he gonna protect us like we protect each other…”.
Attempts to manipulate the fix
4.34. During its investigation, the Authority identified examples within
JPMorgan’s G10 spot FX trading business of attempts to manipulate
fix rates alone or in collusion with traders at other firms in the
manner described in this Notice.
4.35. The traders involved disclosed and received confidential information
to and from traders at other firms regarding the size and direction of
their firms’ net orders at a forthcoming fix. The disclosures provided
these traders with more information than they would otherwise have
had about other firms’ client order flows and thus the likely direction
of the fix.
4.36. These traders used this information to determine their trading
strategies and depending on the circumstances to attempt to
manipulate the fix in the desired direction. They did this by
undertaking a number of actions, typically including one or more of
the following (which would depend on the information disclosed and
the traders involved):
(1)
Traders in a chat room with net orders in the opposite
direction to the desired movement at the fix sought before the
fix to transact or “net off” their orders with third parties
outside the chat room, rather than with other traders in the
chat room. This maintained the volume of orders in the
desired direction held by traders in the chat room and avoided
orders being transacted in the opposite direction at the fix.
Traders within the market have referred to this process as
“leaving you with the ammo” or similar.
(2)
Traders in a chat room with net orders in the same direction
as the desired rate movement at the fix sought before the fix
to do one or more of the following:
(a)
Net off these orders with third parties outside the chat
room, thereby reducing the volume of orders held by
third parties that might otherwise be transacted at the
fix in the opposite direction. Traders within the market
have referred to this process as “taking out the filth” or
“clearing the decks” or similar;
(b)
Transfer these orders to a single trader in the chat room,
thereby consolidating these orders in the hands of one
trader. This potentially increased the likelihood of
successfully manipulating the fix rate since that trader
could exercise greater control over his trading strategy
during the fix than a number of traders acting
separately. Traders within the market have referred to
this as “giving you the ammo” or similar; and/or
(c)
Transact with third parties outside the chat room in
order to increase the volume of orders held by them in
the desired direction. This potentially increased the
influence of the trader(s) at the fix by allowing them to
control a larger proportion of the overall volume traded
at the fix than they would otherwise have and/or to
adopt particular trading strategies, such as trading a
large volume of a currency pair aggressively. This
process was known as “building”.
(3)
Traders increased the volume traded by them at the fix in the
desired direction in excess of the volume necessary to manage
the risk associated with firms’ net buy or sell orders at the fix.
Traders within the market have referred to this process as
“overbuying” or “overselling”.
4.37. The effect of these actions was to increase the influence that those
traders had with regard to the forthcoming fix and therefore the
likelihood of them being able to manipulate the rate in the desired
direction. The trader(s) concerned then traded in an attempt to move
the fix rate in the desired direction.
Example of JPMorgan’s attempts to manipulate the fix
4.38. An example of JPMorgan’s involvement in this behaviour occurred on
one day within the Relevant Period when JPMorgan attempted to
manipulate the WMR fix in the EUR/USD currency pair. On this day,
JPMorgan had net buy orders at the fix which meant that it would
benefit if it was able to move the WMR fix rate upwards.10 The
chances of successfully manipulating the fix rate in this manner
would be improved if JPMorgan and another firm or firms adopted
trading strategies based upon the information they shared with each
other about their net orders.
4.39. In the period between 3:41pm and 3:51pm on this day, traders at
two different firms (including JPMorgan) inappropriately disclosed to
each other via a chat room details about their net orders in respect of
the forthcoming WMR fix in order to determine their trading
strategies. The other firm is referred to in this Final Notice as Firm A.
On the day in question, a third firm (Firm B) was a member of the
chat room, but did not participate in the discussions. JPMorgan then
participated in the series of actions described below in an attempt to
manipulate the fix rate higher.
(1)
At 3:43pm, Firm A asked JPMorgan whether it would need to
buy EUR in the market for the forthcoming WMR fix. JPMorgan
responded that it had net buy orders for the fix, which it
subsequently confirmed amounted to EUR105 million. It
offered to transfer its net buy orders to Firm A.
(2)
At 3:44pm, Firm A replied “maybe” and went on to state that
it had a buy order “for a top [account]” for EUR150 million at
the fix.
(3)
At 3:46pm, Firm A then stated “i'd prefer we join forces”.
JPMorgan responded “perfick…lets do ths…lets double team
em”. Firm A replied “YESsssssssssss”. The Authority considers
these statements to refer to the possibility of JPMorgan and
Firm A co-ordinating their actions in an attempt to manipulate
the fix rate higher. Since JPMorgan and Firm A each needed
to buy EUR at the fix, each would profit to the extent that the
10 JPM would profit if the average rate at which it bought EUR/USD in the market was lower
than the fix rate at which it sold EUR/USD.
fix rate at which it sold EUR was higher than the average rate
at which it bought EUR in the market.
(4)
At 3:47pm and 3:51pm, JPMorgan informed Firm A that it had
conducted trades with third parties that resulted in it needing
to buy additional EUR at the fix. This is an example of
“building”.
(5)
At 3:48pm, Firm A said that it was monitoring activity in
relation to the forthcoming fix in the interdealer broker market
(“i got the bookies covered”).
4.40. In the period leading up to the fix, JPMorgan “built” the volume of
EUR that it needed to buy for the fix to a total of approximately
EUR278 million via a series of transactions with market participants.
Firm A had net buy orders associated with its client fix orders of
EUR170 million in the period leading up to the fix. It increased this
amount (or “built”) by EUR70 million.
4.41. From 3:52pm until the opening of the fix window at 3:59:30pm,
JPMorgan and Firm A bought EUR on the EBS trading platform. In
particular JPMorgan bought EUR57 million from 3:58pm onwards.
These early trades were designed to take advantage of the expected
upward movement in the fix rate following the discussions within the
chat room described above.
4.42. In the first five seconds of the fix window, JPMorgan and Firm A each
placed orders to buy EUR50 million and subsequently placed smaller
orders to buy EUR throughout the remainder of the fix window.
During the 60 second fix window, JPMorgan bought a total of EUR134
million and Firm A bought EUR125 million. Between them, they
accounted for 41% of the volume of EUR/USD bought during the fix
window.
4.43. The rate prevailing on EBS at the start of the fix window was 1.3957.
Over the course of the window period, the rate rose and WM Reuters
subsequently published the fix rate for EUR/USD at 1.39605.
4.44. The information disclosed between JPMorgan and Firm A regarding
their order flows was used to determine their trading strategies. The
consequent “building” by JPMorgan and its trading in relation to that
increased quantity in advance of and during the fix window were
designed to increase the WMR fix rate to JPMorgan’s benefit.
JPMorgan’s trading in EUR/USD in this example generated a profit of
approximately USD33,000.
4.45. Subsequent to the WMR fix, the two traders discussed the outcome of
their trading. At 4:03pm, Firm A stated “sml rumour we havent lost
it”. JPMorgan responded “we…do…dollarrr”.
4.46. The following day Firm A stated to Firm B “we were EPIC at the
[WMR] fix yest”. Firm B responded “yeeeeeeeeeeeeeeeeeeah”. Firm
A added “i dragged [JPMorgan] in , we covered all the bases b/w us”.
Firm B commented “so couldnt have been that $hit a week!!”
Attempts to trigger client stop loss orders
4.47. During its investigation, the Authority identified instances within
JPMorgan’s G10 spot FX trading business of attempts to trigger client
stop loss orders. These attempts involved inappropriate disclosures to
traders at other firms concerning details of the size, direction and
level of client stop loss orders. The traders involved would trade in a
manner aimed at manipulating the spot FX rate, such that the stop
loss order was triggered. JPMorgan would potentially profit from this
activity because if successful it would, for example, have sold the
particular currency to its client pursuant to the stop loss order at a
higher rate than it had bought that currency in the market.
4.48. This behaviour was reflected in language used by G10 spot FX
traders at JPMorgan in chat rooms. For example, a JPMorgan trader
explained to other traders in a chat room that he had traded in the
market in order “to get the 69 print” (i.e. to move the spot FX rate
for that currency pair to the level (“69”) at which a stop loss would
be triggered). On another occasion, the same trader disclosed the
level of certain clients’ stop loss orders to other JPMorgan traders in a
chat room and asked “shall we go get these stops?”.
Inappropriate sharing of confidential information
4.49. The attempts to manipulate the WMR and ECB fixes and trigger client
stop loss orders described in this Notice involved inappropriate
disclosures of client order flows at fixes and details of client stop loss
orders.
4.50. There are also examples in JPMorgan’s G10 spot FX trading business
of disclosures of specific client identities to traders at other firms
during the Relevant Period. These examples involved traders within
that business using informal and sometimes derogatory code words
to communicate details of clients’ activities without mentioning the
clients by name. Disclosing these details gave traders at other firms
notice of the activity of JPMorgan’s clients. This gave those traders
more information about those clients’ activities than they would
otherwise have had. The clients identified were typically significant
market participants, such as central banks, large corporates, pension
funds or hedge funds, whose trading activity was potentially
influential in the market. When these disclosures were made while
the client’s activity was ongoing, there was significant potential for
client detriment.
5.
FAILINGS
5.1.
The regulatory provisions relevant to this Final Notice are referred to
in Annex A.
5.2.
For the reasons set out at paragraphs 4.18 to 4.50 in this Notice,
JPMorgan breached Principle 3 by failing to take reasonable care to
organise and control its affairs properly and effectively in relation to
its G10 spot FX trading business.
6.
SANCTION
6.1.
The Authority’s policy for imposing a financial penalty is set out in
Chapter 6 of the Authority’s Decision Procedure and Penalties Manual
(“DEPP”). In determining the financial penalty, the Authority has had
regard to this guidance.
6.2.
Changes to DEPP were introduced on 6 March 2010. Given that
JPMorgan’s breach occurred both before and after that date, the
Authority has had regard to the provisions of DEPP in force before
and after that date.
6.3.
The application of the Authority’s penalty policy is set out in Annex D
to this Notice in relation to:
(1)
JPMorgan’s breach of Principle 3 prior to 6 March 2010; and
(2)
JPMorgan’s breach of Principle 3 on or after 6 March 2010.
6.4.
In determining the financial penalty to be attributed to JPMorgan’s
breach prior to and on or after 6 March 2010, the Authority has had
particular regard to the following matters as applicable during each
period:
(1)
The need for credible deterrence;
(2)
The nature, seriousness and impact of the breach;
(3)
The failure of JPMorgan to respond adequately during the
Relevant Period in its G10 spot FX trading business to
misconduct identified in well-publicised enforcement actions
against other firms relating to LIBOR / EURIBOR;
(4)
The previous disciplinary record and general compliance
history of JPMorgan; and
(5)
Any applicable settlement discount for agreeing to settle at an
early stage of the Authority’s investigation.
6.5.
The Authority therefore imposes a total financial penalty of
£222,166,000 on JPMorgan comprising:
(1)
A penalty of £40,950,000 relating to JPMorgan’s breach of
Principle 3 under the old penalty regime; and
(2)
A penalty of £181,216,000 relating to JPMorgan’s breach of
Principle 3 under the current penalty regime.
7.
PROCEDURAL MATTERS
Decision maker
7.1.
The decision which gave rise to the obligation to give this Notice was
made by the Settlement Decision Makers.
7.2.
This Final Notice is given under, and in accordance with, section 390
of the Act.
Manner of and time for Payment
7.3.
The financial penalty must be paid in full by JPMorgan to the
Authority by no later than 25 November 2014, 14 days from the date
of the Final Notice.
If the financial penalty is not paid
7.4.
If all or any of the financial penalty is outstanding on 26 November
2014, the Authority may recover the outstanding amount as a debt
owed by JPMorgan and due to the Authority.
7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the
publication of information about the matter to which this notice
relates. Under those provisions, the Authority must publish such
information about the matter to which this notice relates as the
Authority considers appropriate. The information may be published
in such manner as the Authority considers appropriate. However, the
Authority may not publish information if such publication would, in
the opinion of the Authority, be unfair to you or prejudicial to the
interests of consumers or detrimental to the stability of the UK
financial system.
Authority contacts
7.6.
For more information concerning this matter generally, contact Karen
Oliver at the Authority (direct line: 020 7066 1316 / fax: 020 7066
1317).
Enforcement and Financial Crime Division
ANNEX A
RELEVANT STATUTORY AND REGULATORY PROVISIONS
1.
RELEVANT STATUTORY PROVISIONS
1.1.
The Authority’s statutory objectives, set out in section 1B(3) of the
Act, include the integrity objective.
1.2.
Section 206(1) of the Act provides:
“If the Authority considers that an authorised person has contravened
a requirement imposed on him by or under this Act… it may impose
on him a penalty, in respect of the contravention, of such amount as
it considers appropriate."
2.
RELEVANT REGULATORY PROVISIONS
Principles for Businesses
2.1.
The Principles are a general statement of the fundamental obligations
of firms under the regulatory system and are set out in the
Authority’s
Handbook.
They
derive
their
authority
from
the
Authority’s rule-making powers set out in the Act. The relevant
Principle and associated Rules are as follows:
(1)
Principle 3 provides that a firm must take reasonable care to
organise and control its affairs responsibly and effectively,
with adequate risk management systems; and
(2)
PRIN3.2.3R provides that, amongst other things, Principle 3
will apply with respect to the carrying on of unregulated
activities in a prudential context. PRIN3.3.1R provides that
this applies with respect to activities wherever they are carried
on.
DEPP
2.2.
Chapter 6 of DEPP, which forms part of the Authority’s Handbook,
sets out the Authority’s statement of policy with respect to the
imposition and amount of financial penalties under the Act.
The Enforcement Guide
2.3.
The Enforcement Guide sets out the Authority’s approach to
exercising its main enforcement powers under the Act.
2.4.
Chapter 7 of the Enforcement Guide sets out the Authority’s approach
to exercising its power to impose a financial penalty.
ANNEX B
BACKGROUND INFORMATION TO THE SPOT FX MARKET
1.
SPOT FX TRANSACTIONS
1.1.
A “spot FX” transaction is an agreement between two parties to buy
or sell one currency against another currency at an agreed price for
settlement on a “spot date” (usually two business days from the
trade date).
1.2.
Spot FX transactions can be direct (executed between two parties
directly), via electronic broking platforms which operate automated
order matching systems or other electronic trading systems, or
through a voice broker. In practice much of the trading between
firms in the spot FX market takes place on electronic broking
platforms such as Reuters and EBS.
2.
THE 4PM WM REUTERS FIX AND THE 1:15PM ECB FIX
2.1.
WM Reuters publishes a series of rates for various currency pairs at
different times in the day, including at 4pm UK time in particular.
This rate (the “4pm WM Reuters fix”) has become a de facto standard
for the closing spot rate in those currency pairs. For certain currency
pairs, the 4pm WM Reuters fix is calculated by reference to trading
activity on a particular electronic broking platform during a one
minute window (or “fix period”) 30 seconds before and 30 seconds
after 4pm.11 The 4pm WM Reuters fix rates are then published to the
market shortly thereafter.
2.2.
The ECB establishes reference rates for various other currency pairs.
The rate is “based on the regular daily concertation procedure
between central banks within and outside the European System of
Central Banks”.12 This procedure normally takes place at 1:15pm UK
time and the reference rates are published shortly thereafter. This
process is known in FX markets as the ECB fix. The ECB fix is known
colloquially as a “flash” fix, that is to say it reflects the rate at that
particular moment in time.
11 The methodology used by WM Reuters to calculate its rates is set out in the attached link:
http://www.wmcompany.com/pdfs/WMReutersMethodology.pdf
12 The methodology used by ECB to establish its rates is described in the attached link:
http://sdw.ecb.europa.eu/browse.do?node=2018779
2.3.
Rates established at these fixes are used across the UK and global
financial markets by various market participants, including banks,
asset managers, pension funds and corporations. These rates are a
key reference point for valuing different currencies. They are used in
the valuation of foreign currency denominated assets and liabilities,
the valuation and performance of investment portfolios, the
compilation of equity and bond indices and in contracts of different
kinds, including the settlement of financial derivatives.
3.
FIX ORDERS
3.1.
A firm may receive and accept multiple client orders to buy or sell a
particular currency pair for a particular fix on any given day. The firm
agrees to transact with the client at the forthcoming fix rate. In
practice, opposing client orders are effectively “netted” out by the
firm insofar as possible13 and traders at the firm will be responsible
for managing any residual risk associated with the client orders. They
may seek to manage this risk by going into the market and buying or
selling an equivalent amount of the relevant currency to match the
residual risk.
3.2.
At its most straightforward, for example, on any given day a firm
might receive client orders to buy EUR/USD14 500 million at the fix
rate and client orders to sell EUR/USD 300 million at the fix rate. In
this example, the firm would agree to transact all these orders at the
fix rate and would net out the opposing orders for EUR/USD 300
million. The traders at the firm may buy EUR/USD 200 million in the
market to manage the residual risk associated with the client orders.
This net amount is referred to in this Notice as the firm’s “net client
orders” at the fix.
3.3.
A firm does not charge commission on its trading or act as an agent,
but transacts with the client as a principal. A firm in this situation is
exposed to rate movements at the fix. A firm can make a profit or
loss from clients’ fix orders in the following ways:
13 This can be done by “netting off” opposing orders in the same currency pairs or by splitting
the order between its constituent currencies and “netting off” against orders relating to other
currency pairs.
14 The first currency of a currency pair (e.g. EUR in the above example) is called the “base”
currency. The second currency is called the “quote” currency (e.g. USD in the above example).
An order to buy a currency pair is an order to buy the base currency (e.g. EUR) using the quote
currency (e.g. USD) as consideration for the transaction. An order to sell a currency pair is an
order to sell the base currency and to receive the quote currency.
(1)
A firm with net client orders to buy a currency for a
forthcoming fix will make a profit if the fix rate (i.e. the rate at
which it has agreed to sell a quantity of the currency pair to
its client) is higher than the average rate at which the firm
buys the same quantity of that currency pair in the market.
Conversely, the firm will make a loss if the fix rate is lower
than the average rate at which the firm buys the same
quantity of that currency pair in the market.
(2)
A firm with net client orders to sell a currency for a
forthcoming fix will make a profit if the fix rate (i.e. the rate at
which it has agreed to buy a quantity of the currency pair
from its client) is lower than the average rate at which the
firm sells the same quantity of that currency pair in the
market. A loss will be made by the firm if the fix rate is higher
than the average rate at which the firm sells the same
quantity of that currency in the market.
3.4.
A firm legitimately managing the risk arising from its net client orders
at the fix rate may make a profit or a loss from its associated trading
in the market. Such trading can potentially influence the fix rate. For
example, a firm buying a large volume of currency in the market just
before or during the fix may cause the fix rate to move higher. This
gives rise to a potential conflict of interest between a firm and its
clients.
3.5.
It also creates a potential incentive for a firm to seek to attempt to
manipulate the fix rate in the direction that will result in a profit for
the firm. For example, a firm with net client buy orders for the
forthcoming fix can make a profit if it trades in a way that moves the
fix rate higher such that the rate at which it has agreed to sell a
quantity of the currency pair to its client is higher than the average
rate at which it buys that quantity of the currency pair in the market.
Similarly, a firm can profit from net client sell orders if it moves the
fix rate lower such that the rate at which it has agreed to buy a
quantity of the currency pair from its client is lower than the average
rate at which it sells that quantity of the currency pair in the market.
4.
STOP LOSS ORDERS
4.1.
Clients will place stop loss orders with a firm to help manage their
risk arising from movements in the spot FX market. For example, in
circumstances where a client has bought EUR/USD he may place a
stop loss order with a firm to sell EUR/USD at or around a specified
rate below that of his original purchase. By accepting the order, the
firm agrees to transact with the client at or around a specified rate if
the currency trades at that rate in the market. No binding agreement
is made until the agreed rate is “triggered” (i.e. when the currency
trades at that rate in the market).
4.2.
A stop loss order has the effect of managing the client’s risk and
limiting the crystallised loss associated with a currency position taken
by him should the market rate move against him. The size of the stop
loss order and the rate at which it is placed will depend on the risk
appetite of the client. Spot FX traders at the firm will typically be
responsible for managing the order for the client and managing the
risk associated with the order from the firm’s perspective.
4.3.
A firm can potentially make a profit or loss from transacting a client’s
stop loss order in a similar way to that described at paragraph 3.2
above:
(1)
A client’s stop loss order to buy a currency pair is triggered by
the rate moving above a certain specified level. A firm will
make a profit (loss) if it purchases a quantity of the currency
pair in the market at a lower (higher) average rate than that
at which it subsequently sells that quantity of the currency
pair to its client when the stop loss order is executed.
(2)
A client’s stop loss order to sell a currency is triggered by the
rate moving below a certain specified level. A firm will make a
profit (loss) if it sells a quantity of the currency pair in the
market at a higher (lower) average rate than that at which it
subsequently buys that quantity of the currency pair from its
client when the stop loss order is executed.
4.4.
Similar to fix orders, a firm legitimately managing the risk arising
from a client's stop loss order may make a profit or loss from the
trading associated with its risk management. Such a scenario can
also, however, provide a potential incentive for a firm to attempt to
manipulate the rate for a currency pair prevailing in the market to, or
through, a level where the stop loss order is triggered. For example,
a firm will profit from a client’s stop loss order to buy a currency pair
if the firm purchases a quantity of that currency pair and then trades
in a manner that moves the prevailing rate for a currency pair at or
above the level of the stop loss. This would result in the rate at which
the firm sells the currency pair to the client as a result of the
execution of the stop loss being higher than the average rate at
which it has purchased that quantity of the currency pair in the
market.
5.
ELECTRONIC MESSAGING VIA CHAT ROOMS OR SIMILAR
5.1.
The use of electronic messaging was common practice by traders in
the spot FX market during the Relevant Period.
5.2.
A “persistent” chat room allows participants to have ongoing
discussions with other participants from different firms and in
different time zones for extended timeframes. Participants can
communicate via electronic messaging over a period of multiple days,
weeks or months. There can be multiple participants in a particular
persistent chat and once invited an individual will be able to view a
continuous record of the entire discussion thread and participate from
then on.
RELEVANT CODES OF CONDUCT
1.
On 22 February 2001, a number of leading intermediaries, including
JPMorgan, issued a statement setting out a new set of “good practice
guidelines” in relation to foreign exchange trading (the “2001
statement”). The guidelines specified that:
“The handling of customer orders requires standards that strive for
best execution for the customer in accordance with such orders
subject to market conditions. In particular, caution should be taken
so that customers’ interests are not exploited when financial
intermediaries trade for their own accounts… Manipulative practices
by banks with each other or with clients constitute unacceptable
trading behaviour.”15
The
2001
statement
continues,
“Foreign
exchange
trading
management should prohibit the deliberate exploitation of electronic
dealing systems to generate artificial price behaviour.”16
2.
The NIPS Code provided the following relevant guidance:
2.1.
In relation to conflicts of interest, “All firms should identify any
potential or actual conflicts of interest that might arise when
undertaking wholesale market transactions, and take measures either
to eliminate these conflicts or control them so as to ensure the fair
treatment of counterparties.”17
2.2.
In relation to maintaining the confidentiality of information it states
that “Confidentiality is essential for the preservation of a reputable
and efficient market place. Principals and brokers share equal
responsibility for maintaining confidentiality”.18
2.3.
It continues “Principals or brokers should not, without explicit
permission, disclose or discuss or apply pressure on others to
15 Annex 2 to the NIPS Code, November 2011. Original statement issued 22 February 2001 by
16 leading intermediaries in the FX market. Also Annex 2 to the NIPS Code December 2007 and
NIPS Code April 2009.
16 Ibid.
17 Paragraph 5, Part II, NIPS Code, December 2007; and Paragraph 6, Chapter II, NIPS Code,
April 2009 and November 2011.
18 Paragraph 16, Part III, NIPS Code, December 2007; and paragraph 15, Chapter III, NIPS
Code, April 2009 and November 2011.
disclose or discuss, any information relating to specific deals which
have been transacted, or are in the process of being arranged, except
to or with the parties directly involved (and, if necessary, their
advisors) or where this is required by law or to comply with the
requirements of a supervisory body. All relevant personnel should be
made aware of, and observe, this fundamental principle.”19
3.
The ACI Model Code provides the following relevant guidance:
3.1.
In relation to confidentiality it provides that firms must have clearly
documented policies and procedures in place and strong systems and
controls to manage confidential information within the dealing
environment and other areas of the firm which may obtain such
information. It also stipulates that any breaches in relation to
confidentiality should be investigated immediately according to a
properly documented procedure.20
3.2.
In relation to confidential information it provides that “Dealers and
sales staff should not, with intent or through negligence, profit or
seek to profit from confidential information, nor assist anyone with
such information to make a profit for their firm or clients”. It goes on
to clarify that dealers should refrain from trading against confidential
information and never reveal such information outside their firms and
that employees have a duty to familiarise themselves with the
requirements of the relevant legislation and regulations governing
insider dealing and market abuse in their jurisdiction.21
19 Paragraph 16, Part III, NIPS Code, December 2007; and paragraph 15, Chapter III, NIPS
Code, April 2009 and November 2011.
20 Paragraphs 9 and 6, Chapter II, ACI Model Code, April 2009; paragraph 10, ACI Model Code,
September 2012; paragraph 10.1 ACI Model Code, January 2013.
21 Paragraph 9, Chapter II, ACI Model Code, April 2009; paragraph 10(b), ACI Model Code,
September 2012; and paragraph 10.2, ACI Model Code, January 2013.
ANNEX D
PENALTY ANALYSIS
1.
The Authority’s policy for imposing a financial penalty is set out in
Chapter 6 of the Authority’s Decision Procedure and Penalties Manual
(“DEPP”). In determining the financial penalty, the Authority has had
regard to this guidance.
2.
Changes to DEPP were introduced on 6 March 2010. Given that
JPMorgan’s breach occurred both before and after that date, the
Authority has had regard to the provisions of DEPP in force before
and after that date.
3.
The application of the Authority’s penalty policy is set out below in
relation to:
3.1.
JPMorgan’s breach of Principle 3 prior to 6 March 2010; and
3.2.
JPMorgan’s breach of Principle 3 on or after 6 March 2010.
4.
BREACH OF PRINCIPLE 3 PRIOR TO 6 MARCH 2010
4.1.
In determining the financial penalty to be attributed to JPMorgan’s
breach prior to 6 March 2010, the Authority has had particular regard
to the following:
Deterrence – DEPP 6.5.2G(1)
4.2.
The principal purpose of a financial penalty is to promote high
standards of regulatory conduct by deterring firms who have
breached
regulatory
requirements
from
committing
further
contraventions, helping to deter other firms from committing
contraventions and demonstrating generally to firms the benefits of
compliant behaviour. The Authority considers that the need for
deterrence means that a very significant financial penalty against
JPMorgan is appropriate.
The nature, seriousness and impact of the breach – DEPP
6.5.2G(2)
4.3.
JPMorgan’s breach was extremely serious. The failings in JPMorgan’s
procedures, systems and controls in its G10 spot FX trading business
occurred over a period of more than two years prior to 6 March 2010.
This gave rise to a risk that JPMorgan’s traders would engage in the
behaviours
described
in
this
Notice,
including
inappropriate
disclosures of confidential information and attempts to manipulate
the 4pm WM Reuters fix and the 1:15pm ECB fix and to trigger client
stop loss orders. JPMorgan’s breach undermines confidence not only
in the spot FX market, but also in the wider UK financial system.
The size and financial resources of the Firm – DEPP 6.5.2G(5)
4.4.
JPMorgan is one of the biggest, most sophisticated and well-
resourced financial services institutions in the UK. Serious breaches
committed by such a firm warrant a significant penalty.
Other action taken by the Authority – DEPP 6.5.2G(10)
4.5.
In determining whether and what financial penalty to impose on
JPMorgan in respect of its breach of Principle 3, the Authority has
taken into account action taken by the Authority in relation to
comparable breaches.
4.6.
The Authority considers that JPMorgan’s breach of Principle 3 in the
period prior to 6 March 2010 merits a significant financial penalty of
£58,500,000 before settlement discount.
4.7.
JPMorgan agreed to settle at an early stage of the Authority’s
investigation. JPMorgan therefore qualified for a 30% (Stage 1)
discount under the Authority’s executive settlement procedures. The
financial penalty for JPMorgan’s breach of Principle 3 in the period
prior to 6 March 2010 is therefore £40,950,000.
5.
BREACH OF PRINCIPLE 3 ON OR AFTER 6 MARCH 2010
5.1.
In respect of any breach occurring on or after 6 March 2010, the
Authority applies a five-step framework to determine the appropriate
level of financial penalty. DEPP 6.5A sets out the details of the five-
step framework that applies in respect of financial penalties imposed
on firms.
5.2.
At Step 1 the Authority seeks to deprive a firm of the financial benefit
derived directly from the breach where it is practicable to quantify
this (DEPP 6.5A.1G). The Authority considers that it is not practicable
to quantify the financial benefit that JPMorgan may have derived
directly from its breach.
5.3.
Step 1 is therefore £0.
Step 2: The seriousness of the breach
5.4.
At Step 2 the Authority determines a figure that reflects the
seriousness of the breach (DEPP 6.5A.2G). Where the amount of
revenue generated by a firm from a particular product line or
business area is indicative of the harm or potential harm that its
breach may cause, that figure will be based on a percentage of the
firm’s revenue from the relevant products or business area.
5.5.
The Authority considers revenue to be an indicator of the harm or
potential harm caused by the breach. The Authority has therefore
determined a figure based on a percentage of JPMorgan’s relevant
revenue. The Authority considers that the relevant revenue for the
period from 6 March 2010 to 15 October 2013 is £121,000,000.
5.6.
In deciding on the percentage of the relevant revenue that forms the
basis of the Step 2 figure, the Authority considers the seriousness of
the breach and chooses a percentage between 0% and 20%. This
range is divided into five fixed levels which represent, on a sliding
scale, the seriousness of the breach; the more serious the breach,
the higher the level. For penalties imposed on firms there are the
following five levels:
Level 1 – 0%
Level 2 – 5%
Level 3 – 10%
Level 5 – 20%
5.7.
In assessing the seriousness level, the Authority takes into account
various factors which reflect the impact and nature of the breach,
and whether it was committed deliberately or recklessly. The
Authority considers that the following factors are relevant:
Impact of the breach
(1)
The breach potentially had a very serious and adverse effect
on markets, having regard to whether the orderliness of or
confidence in the markets in question had been damaged or
put at risk. This is due to the fundamental importance of spot
FX benchmarks and intra-day rates for G10 currencies, their
widespread use by market participants and the consequent
negative impact on confidence in the spot FX market and the
wider UK financial system arising from misconduct in relation
to them;
Nature of the breach
(2)
There were serious and systemic weaknesses in JPMorgan’s
procedures, systems and controls in its G10 spot FX trading
business over a number of years;
(3)
JPMorgan failed adequately to address obvious risks in that
business in relation to conflicts of interest, confidentiality and
trading conduct. These risks were clearly identified in industry
codes published before and during the Relevant Period;
(4)
JPMorgan’s failings allowed improper trader behaviours to
occur in its G10 spot FX trading business as described in this
Notice. These behaviours were egregious and at times
collusive in nature;
(5)
There was a potential detriment to clients and to other market
participants arising from misconduct in the G10 spot FX
market;
(6)
Certain of those responsible for managing front office matters
at JPMorgan were aware of and/or at times involved in
behaviours described in this Notice in the period on or after 6
March 2010; and
Whether the breach was deliberate or reckless
(7)
The Authority has not found that JPMorgan acted deliberately
or recklessly in the context of the Principle 3 breach.
5.8.
Taking all of these factors into account, the Authority considers the
seriousness of JPMorgan’s Principle 3 breach on or after 6 March
2010 to be level 5 and so the Step 2 figure is 20% of £121,000,000.
5.9.
Step 2 is therefore £24,200,000.
Step 3: Mitigating and aggravating factors
5.10. At Step 3 the Authority may increase or decrease the amount of the
financial penalty arrived at after Step 2 to take into account factors
which aggravate or mitigate the breach (DEPP 6.5A.3G).
5.11. The Authority considers that the following factors aggravate the
(1)
The firm’s previous disciplinary record and general compliance
(a)
On 18 September 2013, JPMorgan was fined over £137
million for breaches of Principles 2, 3, 5 and 11 in
connection with USD6.2 billion trading losses caused by
a high risk trading strategy;
was fined just over £3 million for breaches of Principle 3
and SYSC 9.1.1R relating to its failure to take reasonable
care to organise and control its affairs in relation to its
provision of retail investment advice and portfolio
investment services; and
(c)
On 25 May 2010, J.P. Morgan Securities Limited was
fined £33.3 million for breaches of Principle 10 and Client
Money Rules in relation to failings concerning the
protection and segregation of client money.
(2)
JPMorgan’s failure to respond adequately during the Relevant
Period in its G10 spot FX trading business to misconduct
identified in well-publicised enforcement actions against other
firms relating to LIBOR / EURIBOR; and
(3)
Despite the fact that certain of those responsible for managing
front office matters were aware of and/or at times involved in
behaviours described in this Notice, they did not take steps to
stop those behaviours.
5.12. Having taken into account these aggravating factors, the Authority
considers that the Step 2 figure should be increased by 40%.
5.13. Step 3 is therefore £33,880,000.
Step 4: Adjustment for deterrence
5.14. If the Authority considers the figure arrived at after Step 3 is
insufficient to deter the firm who committed the breach, or others,
from committing further or similar breaches, then the Authority may
increase the penalty.
5.15. The Authority does not consider that the Step 3 figure of
£33,880,000 represents a sufficient deterrent in the circumstances of
this case.
5.16. One of the Authority’s stated objectives when introducing the penalty
policy on 6 March 2010 was to increase the level of penalties to
ensure credible deterrence. The Authority considers that penalties
imposed under this policy should be materially higher than penalties
for similar breaches imposed pursuant to the policy applicable before
that date.
5.17. The failings described in this Notice allowed JPMorgan's G10 spot FX
trading business to act in JPMorgan's own interests without proper
regard for the interests of its clients, other market participants or the
financial markets as a whole. JPMorgan’s failure to control properly
the activities of that business in a systemically important market
such as the G10 spot FX market undermines confidence in the UK
financial system and puts its integrity at risk. The Authority regards
these as matters of the utmost importance when considering the
need for credible deterrence.
5.18. JPMorgan’s response to misconduct identified in well-publicised
enforcement actions against other firms relating to LIBOR / EURIBOR
failed adequately to address in its G10 spot FX business the root
causes that gave rise to failings described in this Notice. This
indicates that industry standards have not sufficiently improved in
relation to identifying, assessing and managing appropriately the
risks that firms pose to markets in which they operate. The largest
penalty imposed to date in relation to similar failings in the context of
LIBOR / EURIBOR was a penalty against a firm of £200,000,000
(before settlement discount) under the Authority’s penalty policy
prior to 6 March 2010. The Authority considers that the penalty
imposed for the failings in this Notice should as a minimum
significantly exceed that level for credible deterrence purposes.
5.19. The Authority considers that in order to achieve credible deterrence,
the Step 3 figure should be increased by the sum of £225,000,000.
5.20. Step 4 is therefore £258,880,000.
Step 5: Settlement discount
5.21. If the Authority and JPMorgan, on whom a penalty is to be imposed,
agree the amount of the financial penalty and other terms, DEPP 6.7
provides that the amount of the financial penalty which might
otherwise have been payable will be reduced to reflect the stage at
which the Authority and JPMorgan reached agreement. The
settlement discount does not apply to the disgorgement of any
benefit calculated at Step 1.
5.22. The Authority and JPMorgan reached agreement at Stage 1 and so a
30% discount applies to the Step 4 figure.
5.23. Step 5 is therefore £181,216,000.
6.
CONCLUSION
6.1.
The Authority therefore imposes a total financial penalty of
£222,166,000 on JPMorgan comprising:
(1)
A penalty of £40,950,000 relating to JPMorgan’s breach of
Principle 3 under the old penalty regime; and
(2)
A penalty of £181,216,000 relating to JPMorgan’s breach of
Principle 3 under the current penalty regime.