FINAL NOTICE

To:
The Royal Bank of Scotland plc


Firm

1.
ACTION

1.1.
For the reasons given in this Notice, the Authority hereby imposes on

The Royal Bank of Scotland plc (“RBS”) a financial penalty of

£217,000,000.

1.2.
RBS agreed to settle at an early stage of the Authority’s

investigation. RBS 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 £310,000,000 on RBS.

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, RBS 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

RBS’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.
RBS’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.
RBS 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 RBS’s G10 spot FX trading business refer

to its relevant voice trading desk based in London.

2.5.
During the Relevant Period, RBS did not exercise adequate and

effective control over its G10 spot FX trading business. RBS relied

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.

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 RBS’s G10 spot FX trading business, which resulted in it acting in

RBS’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 RBS 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. RBS’s control and risk functions failed to challenge

effectively the management of these risks in the G10 spot FX trading

business.

2.6.
RBS’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 RBS’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 RBS’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 RBS received client complaints in October 2010 and January

2012, and, in November 2011, a trader questioned whether it was

inappropriate to share information with traders at other firms or with

clients.

2.8.
RBS was on notice about misconduct associated with LIBOR /

EURIBOR during the Relevant Period. The Authority issued a Final

Notice and a financial penalty against RBS on 6 February 2013 in

relation to benchmark setting for LIBOR. Against this background,

RBS engaged in an extensive remediation programme across its

businesses in response to LIBOR / EURIBOR, including taking

important steps to promote changes to culture and values. Despite

these improvements, the steps taken during the Relevant Period in

its G10 spot FX trading 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 RBS in the

amount of £217,000,000 pursuant to section 206 of the Act.

2.10. The Authority has considered the nature and extent of co-operation

provided by RBS during the course of its investigation. The Authority

acknowledges that RBS acted promptly in bringing the behaviours

referred to in this Notice to the Authority’s attention. RBS has also

provided extremely good co-operation and taken significant steps to

assist the Authority in its investigation. RBS 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 RBS in this regard.

2.11. This Notice relates solely to RBS’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.

7


4.3.
The FX market includes transactions involving the exchange of

currencies between two parties at an agreed rate for settlement on a

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 a 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

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

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

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 RBS

4.15. RBS is a full service bank, headquartered in Edinburgh, Scotland with

operations in retail, wholesale and investment banking.

4.16. Throughout the Relevant Period, RBS’s spot FX business was a part of

RBS’s currencies trading business. The governance of that business

changed on several occasions throughout the Relevant Period,

depending upon its location within the overall RBS Group structure.

RBS’s spot FX business is currently part of its Markets division. In the

Relevant Period, RBS’s spot FX business operated predominately out

of five central hubs in London, Connecticut, Hong Kong (until mid-

2008), Singapore (since mid-2008) and Tokyo (2008 to 2012),

together with a number of additional offices globally. According to the

Euromoney4 FX Survey 2013, RBS was listed in the top seven firms in

terms of market share in global FX trading in spot and forwards.

4.17. During the Relevant Period, RBS employed a “three lines of defence”

model to manage risk. The first line of defence comprised RBS’s front

office which was responsible for, among other things, identifying,

assessing and managing the risks arising in relation to the business.

The second line of defence was RBS’s support line (comprising

various functional and technical experts such as Compliance and the

Market Risk, Credit Risk and Operational Risk functions). They were

responsible for producing policies and procedures to assist the first

line to comply with applicable laws and regulations, providing advice

on identifying and managing risks and assisting to establish

appropriate controls and tests. RBS’s Group Internal Audit comprised

the third line of defence.

The failures of systems and controls at RBS

4.18. In accordance with Principle 3, RBS 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

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.

spot FX market generally and the wider UK financial system. RBS

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

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.

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 2.2 of Annex C

Failure adequately to identify, assess and manage risks in RBS’s G10

spot FX trading business

4.22. RBS 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. RBS’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

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 RBS’s benefit and to the

disadvantage of certain of its clients. If disclosed by RBS 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 RBS’s clients, acting either alone or

in collusion with G10 spot FX traders at RBS. This gave rise to

obvious risks in RBS’s G10 spot FX trading business concerning

conflicts of interest, confidentiality and trading conduct. These risks

were exacerbated, prior to August 2012, by the widespread use by

RBS’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, RBS’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 RBS’s G10 spot FX trading

business, which resulted in it acting in RBS’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 RBS 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 RBS 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 RBS’s business divisions. Some additional

guidance was provided to G10 spot FX traders in January 2013 in

relation to appropriate trading in the market to manage the risk

arising from net clients orders at the fix. However, the guidance

failed to explain sufficiently the different types of trading behaviour

that it was unacceptable for RBS’s G10 spot FX traders to engage in.

4.26. RBS 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. They contained few

practical examples about their application 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 RBS’s general policies to its G10 spot FX trading

business increased the risk that misconduct would occur.

4.27. RBS’s day-to-day oversight of its G10 spot FX traders’ conduct was

insufficient. There was inadequate supervision by RBS of those

traders’ conduct and use of chat rooms or similar communications

during the Relevant Period. None of the systems and controls in

RBS’s FX business were adequate to detect and prevent the

behaviours described in this Notice.

4.28. RBS’s second and third lines of defence failed to challenge effectively

the management of these risks by RBS’s front office. From January

2010, RBS introduced very limited monitoring of chat rooms, but

failed to identify the inappropriate disclosures of confidential

information and collusive conduct by traders described in this Notice.

On 20 August 2012, RBS banned its traders from participating in

permanent chats with their counterparts at other firms and traders

were provided with additional guidance regarding the appropriate

content of their chats. Whilst the number of chatrooms in which RBS

London based traders participated materially reduced following this

ban, there were exceptions to the ban which some traders exploited.

An improved communications monitoring system was piloted in

December 2012 and February 2013 and subsequently rolled out in

full after the end of the Relevant Period.

4.29. RBS 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. For
the
reasons
set
out
above,
despite
certain
significant

improvements made to RBS’s controls relating to its G10 spot FX

trading business, RBS nonetheless failed during the Relevant Period

to address or manage sufficiently the risks in that business. These

failings were 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)
RBS was on notice about misconduct associated with LIBOR /

EURIBOR during the Relevant Period. The Authority published

a Final Notice against another firm in relation to LIBOR /

EURIBOR in June 2012. The Authority issued a Final Notice

and a financial penalty against RBS on 6 February 2013 in

relation to misconduct around LIBOR.

(3)
These Final Notices highlighted, amongst other things,

significant failings in the management and control of traders’

activities by front office businesses at RBS and other firms,

including 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 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 to occur undetected

over a number of years.

(4)
After the Authority published a Final Notice in relation to

LIBOR / EURIBOR against a different firm in June 2012, RBS

undertook a wide ranging review to assess whether similar

issues could arise for RBS in relation to other benchmarks and

indices. RBS considered whether similar issues could arise in

different parts of its business and initiated a remediation

programme across its Markets division. This programme

focussed
initially
on
the
review
and
enhancement
of

governance and controls around rates submissions. As a

result, RBS made a number of improvements, including to its

governance structure, risk and control framework, policies,

and guidance and training for staff. Some of these

improvements were directed towards addressing issues of

culture and were implemented throughout the firm. By mid-

2013, the focus of RBS’s remediation initiative was extended

to price submissions and transaction-based benchmarks.

(5)
Despite these improvements, RBS 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

RBS. As a result, RBS did not appropriately mitigate the risks

of potential trader misconduct in its G10 spot FX trading

business.

(6)
In October 2010 and January 2012, RBS received complaints

from two clients concerning disclosures of information about

client orders. In November 2011, a trader questioned whether

it was inappropriate for traders at RBS to share information

with traders at other firms or with clients, including order book

information. These incidents should have highlighted to RBS

the
risks
associated
with
inappropriate
disclosures
of

information in its FX business.

Inappropriate trading behaviour and misuse of confidential

information

4.31. RBS’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 RBS’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 RBS’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 “1

team, one dream”, “a co-operative” 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. A RBS trader in one group referred to it as “a 3 way

relationship built on immense trust”. On another occasion, the same

trader thanked a trader at another firm for disclosing his selling

interest ahead of a fix as it helped them align their trading (“cheers

for saying you were same way helped me go early”).

Attempts to manipulate the fix

4.34. During its investigation, the Authority identified examples within

RBS’s G10 spot FX trading business of attempts to manipulate fix

rates alone or in collusion with 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 their 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 RBS’s attempts to manipulate the fix

4.38. An example of RBS’s involvement in this behaviour occurred on one

day within the Relevant Period when RBS attempted to manipulate

the WMR fix in the GBP/USD currency pair. On this day, RBS had net

client sell orders at the fix which meant that it would benefit if it was

able to move the WMR fix rate lower.10 The chances of successfully

manipulating the fix rate in this manner would be improved if RBS

and other firms adopted trading strategies based upon the

information they shared with each other about their net orders.

4.39. In the period between 3:22pm and 3:54pm on this day, traders at

four different firms (including RBS) inappropriately disclosed to each

other via a chat room details of their net orders in respect of the

forthcoming 4pm WMR fix in order to determine their trading

strategies. The three other firms are referred to in this Decision

Notice as Firms A, B and C. RBS then participated in the series of

actions described below in an attempt to manipulate the fix rate

lower.

(1)
At 3:22pm, Firm A disclosed that it had net sell orders of

about GBP200 million at the WMR fix. This disclosure

prompted RBS to respond “blimey … judging by liq today…”

10 RBS would profit if the average rate at which it sold GBP/USD in the market was higher than
the fix rate at which it bought GBP/USD.

which was an observation that this was a large order in light

of the day’s liquidity.

(2)
At 3:45pm, Firm A disclosed that another of its offices needed

to sell GBP100 million at the fix. RBS disclosed that it also had

net sell orders of GBP80 million at the fix. Since RBS and Firm

A each needed to sell GBP at the fix, each would profit to the

extent that the fix rate at which it bought GBP was lower than

the average rate at which it sold GBP in the market.

(3)
At 3:46pm, Firm B disclosed that it needed to sell about

GBP60 million at the fix.

(4)
At 3:48pm, Firm C disclosed that it needed to buy the same

amount of GBP at the fix as Firm B was selling and they

agreed to net off these orders.

(5)
At 3:51pm, RBS updated the participants in the chat room

that it now needed to sell more than the GBP200 million at the

fix that Firm A needed to sell. RBS made a further disclosure

of its net sell orders for the fix in a separate chat room

involving three further firms “we getting alot betty11 at fix”.

(6)
At 3:54pm, Firm A disclosed to RBS that it had netted off part

of its net sell orders with two other parties outside the chat

room, but that Firm A still needed to sell about GBP140 million

at the fix. This is an example of Firm A “clearing the decks”.

4.40. In the period leading up to the 4pm fix, RBS increased (or “built”) the

volume of GBP it would sell at the fix via a series of trades conducted

with other market participants. RBS commenced this “building” after

Firm A’s disclosure of its net sell orders at 3:22pm. Subsequently

RBS received further client orders for the fix and briefly had net

orders to buy GBP25 million before further “building” and client

orders resulted in RBS having to sell GBP at the fix. Ultimately,

RBS’s net sell orders associated with its client fix orders was GBP202

million; it “built” the volume of currency that it needed to sell at the

fix to GBP399 million, well above that necessary to manage the risk

associated with net client orders.

11 “betty” is a slang term commonly used in the FX markets for GBP/USD. It is derived from
rhyming slang. Betty is short for Betty Grable, that is cable, which in the market means the
GBP/USD currency pair.

4.41. From 3:50:30pm to 3:52:10pm, RBS placed a series of sell orders in

the GBP/USD currency pair on the Reuters platform. During this

period, RBS sold GBP93 million and the GBP/USD rate dropped from

1.6276 to 1.6250. At 3:52pm, Firm C commented “nice job gents”.

4.42. In the period from 3:50:30pm to 3:59:30pm (i.e. immediately prior

to the 4pm WMR fix window), RBS sold a total of GBP167 million and

Firm A sold GBP26 million. Together they accounted for 28% of all

sales on the Reuters platform during this period. The GBP/USD rate

steadily dropped from 1.6276 to 1.6233. These early trades were

designed to take advantage of the expected downwards movement in

the fix rate following the discussions within the chat rooms described

above.

4.43. During the 60 second fix window, RBS sold GBP182 million, which

accounted for more than 32% of the sales in GBP/USD on the

Reuters platform. RBS and Firm A together accounted for 41% of the

sales in GBP/USD on the Reuters platform during the fix window.

During this period, the GBP/USD rate fell from 1.6233 to 1.6213.

Subsequently WM Reuters published the 4pm fix rate for GBP/USD at

1.6218.

4.44. The information disclosed between RBS and Firms A, B and C,

regarding their order flows was used to determine their trading

strategies. The consequent “building” by RBS and its trading in

relation to that increased quantity in advance of and during the fix

window, were designed to lower the WMR fix rate to RBS’s benefit.

RBS’s trading in GBP/USD in this example generated a profit of

USD615,000.

4.45. The trading was discussed by the participants in the chat rooms

subsequent to the fix, with references to “I don my hat”, “welld one

[sic] lads”, “what a job”, “bravo” and “[RBS] is god”. RBS

commented
when
the
4pm
WMR
fix
rate
was
published

“1.6218…nice”, whilst Firm A commented later on ”we fooking killed it

right… [Firm C], myself and RBS”.

Attempts to trigger client stop loss orders

4.46. During its investigation, the Authority identified instances within

RBS’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. RBS 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.

4.47. This behaviour was reflected in language used by G10 spot FX

traders at RBS in chat rooms. For example, in one chat, an RBS

trader asked a trader at another firm in a chat room to attempt to

trigger one of his client’s stop loss orders (“HIT IT … I’m out of

bullets haha”).

Inappropriate sharing of confidential information

4.48. 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.

4.49. There are also examples in RBS’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 RBS’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 4.49 in this Notice,

RBS 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 RBS’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)
RBS’s breach of Principle 3 prior to 6 March 2010; and

(2)
RBS’s breach of Principle 3 on or after 6 March 2010.

6.4.
In determining the financial penalty to be attributed to RBS’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 RBS to respond adequately during the Relevant

Period in its G10 spot FX trading business to investigations

and enforcement actions against RBS and other firms relating

to LIBOR / EURIBOR;

(4)
The previous disciplinary record and general compliance

history of RBS; 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

£217,000,000 on RBS comprising:

(1)
A penalty of £36,400,000 relating to RBS’s breach of Principle

3 under the old penalty regime; and

(2)
A penalty of £180,600,000 relating to RBS’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 RBS 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 RBS 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) or Lance Ellison (direct line: 020 7066 2422).

Enforcement and Financial Crime Decision


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.12 The 4pm WM Reuters fix rates are then published to the

market shortly thereafter.

2.2.
The ECB establishes reference rates for various currency pairs. The

rate is “based on the regular daily concertation procedure between

central banks within and outside the European System of Central

Banks”.13 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.

12 The methodology used by WM Reuters to calculate its rates is set out in the attached link:
http://www.wmcompany.com/pdfs/WMReutersMethodology.pdf.
13 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 possible14 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/USD15 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:

14 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.
15 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 has been “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 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 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.”16

The
2001
statement
continues,
“Foreign
exchange
trading

management should prohibit the deliberate exploitation of electronic

dealing systems to generate artificial price behaviour.”17

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.”18

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”.19

16 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.
17 Ibid.
18 Paragraph 5, Part II, NIPS Code, December 2007; paragraph 6, Chapter II, NIPS Code, April
2009 and November 2011.
19 Paragraph 16, Part III, NIPS Code, December 2007; and paragraph 15, Chapter III, NIPS
Code, April 2009 and November 2011.

2.3.
It continues “Principals or brokers should not, without explicit

permission, disclose or discuss or apply pressure on others to

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.”20

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.21

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.22

20 Paragraph 16, Part III, NIPS Code, December 2007; and paragraph 15, Chapter III, NIPS
Code, April 2009 and November 2011.
21 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.
22 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 RBS’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.
RBS’s breach of Principle 3 prior to 6 March 2010; and

3.2.
RBS’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 RBS’s breach

prior to 6 March 2010, the Authority has had particular regard to the

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

RBS is appropriate.

The nature, seriousness and impact of the breach – DEPP

6.5.2G(2)

4.3.
RBS’s breach was extremely serious. The failings in RBS’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.

They allowed the behaviours described in this Notice to occur during

this period, 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. In addition,

certain of those responsible for managing front office matters were

aware of and at times involved in behaviours described in this Notice

in the period from 1 January 2008 to 5 March 2010. RBS’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.
RBS 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.

Disciplinary record and compliance history – DEPP 6.5.2G(9)

4.5.
On 12 December 2002, RBS was fined £750,000 for contravening the

Authority’s Money Laundering Handbook (in force at the time) by

failing adequately to establish customers’ identities prior to opening

an account.

Other action taken by the Authority – DEPP 6.5.2G(10)

4.6.
In determining whether and what financial penalty to impose on RBS

in respect of its breach of Principle 3, the Authority has taken into

account action taken by the Authority in relation to comparable

breaches.

4.7.
The Authority has also considered the nature and extent of co-

operation provided by RBS during the course of its investigation. The

Authority acknowledges that RBS has provided extremely good co-

operation and taken significant steps to assist the Authority in its

investigation.

4.8.
The Authority considers that RBS’s breach of Principle 3 in the period

prior to 6 March 2010 merits a significant financial penalty of

£52,000,000 before settlement discount.

4.9.
RBS agreed to settle at an early stage of the Authority’s

investigation. RBS therefore qualified for a 30% (Stage 1) discount

under the Authority’s executive settlement procedures. The financial

penalty for RBS’s breach of Principle 3 in the period prior to 6 March

2010 is therefore £36,400,000.

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 RBS 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 RBS’s relevant

revenue. The Authority considers that the relevant revenue for the

period from 6 March 2010 to 15 October 2013 is £150,000,000.

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 RBS’s

procedures, systems and controls in its G10 spot FX trading

business over a number of years;

(3)
RBS 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)
RBS’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 RBS 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 RBS 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 RBS’s Principle 3 breach on or after 6 March 2010 to

be level 5 and so the Step 2 figure is 20% of £150,000,000.

5.9.
Step 2 is therefore £30,000,000.

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 2 August 2010, RBS was fined £5.6 million for a

breach of Principle 3 in relation to customer screening

for money laundering and the financing of terrorist

activities;

(b)
On 11 January 2011, RBS (together with National

Westminster Bank plc) was fined £2.8 million for

breaches of Principle 3 and Principle 6 and Rules in the

Dispute Resolution: Complaints sourcebook;

(c)
On 7 November 2011 and 23 March 2012, Coutts & Co

was fined £6.3 million and £8.75 million for breaches of

Principle 9 and Principle 3 respectively. Coutts & Co’s

breach of Principle 3 concerned its failure to take

reasonable care to establish and maintain effective anti-

money laundering systems and controls;

(d)
On 6 February 2013, RBS was fined £87.5 million for

breaches of Principle 3 and Principle 5 in relation to

attempts to manipulate the LIBOR benchmark;

(e)
On 16 July 2013, RBS (together with Royal Bank of

Scotland N.V.) was fined £5,620,300 for breaches of

Principle 3 and the rules in SUP 17 in relation to the

complete or partial failure by the firm to report

transactions; and

(f)
On 27 August 2014, RBS (together with National

Westminster Bank Plc) was fined almost £15 million for

breaches of Principle 2 and Principle 9 in relation to

failure to take reasonable care to ensure the suitability

of mortgage advice to customers and failing to

adequately remedy those failings when identified;

(2)
RBS’s failure to respond adequately during the Relevant Period

in its G10 spot FX trading business to investigations and

enforcement actions against RBS and other firms relating to

LIBOR / EURIBOR; and

(3)
Despite the fact that certain of those with responsibility for

managing front office matters were aware of and/or at times

involved in the behaviours described in this Notice, they did

not take steps to stop those behaviours.

5.12. As a mitigating factor, the Authority has taken into account RBS’s co-

operation as described at paragraph 2.10 of the Notice.

5.13. Having taken into account these aggravating and mitigating factors,

the Authority considers that the Step 2 figure should be increased by

5.14. Step 3 is therefore £33,000,000.

Step 4: Adjustment for deterrence

5.15. 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.

5.16. The Authority does not consider that the Step 3 figure of

£33,000,000 represents a sufficient deterrent in the circumstances of

this case.

5.17. One of the Authority’s stated objectives when introducing its 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.

5.18. The failings described in this Notice allowed RBS’s G10 spot FX

trading business to act in RBS’s own interests without proper regard

for the interests of its clients, other market participants or the

financial markets as a whole. RBS’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.

5.19. RBS’s response to misconduct 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.

5.20. The Authority considers that in order to achieve credible deterrence,

the Step 3 figure should be increased by the sum of £225,000,000.

5.21. Step 4 is therefore £258,000,000.

Step 5: Settlement discount

5.22. If the Authority and RBS, 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 RBS reached agreement. The settlement

discount does not apply to the disgorgement of any benefit calculated

at Step 1.

5.23. The Authority and RBS reached agreement at Stage 1 and so a 30%

discount applies to the Step 4 figure.

5.24. Step 5 is therefore £180,600,000.

6.
CONCLUSION

6.1.
The Authority therefore imposes a total financial penalty of

£217,000,000 on RBS comprising:

(1)
A penalty of £36,400,000 relating to RBS’s breach of Principle

3 under the old penalty regime; and

(2)
A penalty of £180,600,000 relating to RBS’s breach of

Principle 3 under the current penalty regime.