UBS First to Report FX Rigging Shows EU Immunity Flaws
UBS AG (UBSN) may receive full immunity from European Union currency-rigging fines after it was the first to approach antitrust regulators in the probe, sparking criticism that the bank has received enough forgiveness.
UBS, which avoided a 2.5 billion-euro ($3.45 billion) penalty in the EU’s probe into manipulation of the yen London interbank offered rate last year, was again first to cooperate in the currency investigation, according to a person with knowledge of the case, who declined to be identified because the process is confidential.
“To get off scot-free, I think, is not the right message to send,” Arlene McCarthy, the lawmaker who led the EU’s work on creating criminal sanctions for bankers who rig benchmarks, said in an interview. “I’m not in favor of the confessional approach not attracting any fines or sanctions.”
Authorities on three continents are investigating whether traders at some of the world’s largest banks sought to manipulate the WM/Reuters currency rates by working with dealers at other firms and timing trades to influence benchmarks and maximize profits. UBS, the largest Swiss bank, has suspended at least five foreign-exchange traders as part of its own probe.
Richard Morton, a spokesman for Zurich-based UBS, declined to comment on immunity in the FX probe. Antoine Colombani, a spokesman for Competition Commissioner Joaquin Almunia, declined to comment on the EU’s preliminary investigation.
A decision on whether the bank will receive full immunity won’t be made until the end of the investigation after regulators review the level of cooperation. EU leniency wouldn’t enable UBS to escape fines from the U.K. Financial Conduct Authority or some of the U.S. authorities that don’t grant immunity.
The EU’s current reliance on its leniency program to uncover cartels is “rather disappointing,” said Andreas Schwab, the lawmaker leading the European Parliament’s work to encourage lawsuits over price-fixing. The EU’s competition arm should have more staff to put it in a position to initiate its own probes with no immunity granted, he said.
“While immunity applicants might be spared fines, they can still be held to pay damages to injured parties,” Schwab said.
UBS and Barclays Plc (BARC) avoided a total 3.2 billion euros in penalties from the EU after self-reporting manipulation of Libor and Euribor. The EU levied a record fine of 1.7 billion euros against six other finance firms in December for colluding to rig the rate.
Only companies that “took steps to coerce” other firms to join a cartel or to remain in it are “not eligible for immunity from fines,” according to EU rules. Such companies can still obtain reductions from antitrust penalties.
The EU’s program is “too lenient, quite clearly,” McCarthy said. The “gravity and seriousness” of these infringements “shouldn’t qualify them for no fine,” she said.
Amnesty does have supporters. Many economists still think that letting repeat offenders avoid antitrust fines by exposing misbehavior is “the optimal thing to do,” as long as sanctions are “sufficiently robust” for other participants, said Giancarlo Spagnolo, an economics professor at the University of Rome Tor Vergata and Stockholm School of Economics.
“The objective of the leniency program is to destabilize the cartel,” he said. “So if UBS wasn’t eligible for leniency it might not have run to the commission” and the cartel might never have been stopped.
UBS opened a review of its operations in the $5.3 trillion-a-day currency market last year. Traders at some banks exchanged information on instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia.”
The Swiss Competition Commission opened an investigation earlier this week into UBS, Credit Suisse Group AG and six more firms over “indications that these banks made agreements to manipulate currency rates.” JPMorgan Chase & Co. (JPM), Citigroup, Barclays, RBS, Zuercher Kantonalbank and Julius Baer Group Ltd. are also being probed, the Bern-based watchdog said.
The Swiss Financial Market Supervisory Authority, known as Finma, last year ordered UBS to add 28 billion Swiss francs ($31.6 billion) to its assets, weighted for risk, because of the operational risk posed by litigation and investigations. It was lowered to 22.5 billion francs by the time its year-end results were published.
Christopher Wheeler, a London-based analyst at Mediobanca SpA, estimates that the Swiss finance regulator’s requirement implies a pretax loss of around 2.9 billion Swiss francs, under the bank’s targets for common equity.
“Finma is giving you a clue on the scale of the risk,” Wheeler said. “The market assumes the biggest risk lies in the forex investigation.”
Offering immunity to companies that are first to bring collusion to light is the “main and most effective tool to detect illegal cartels,” the EU antitrust regulator said when its Libor and Euribor fines were published in December.
In all of the cartel fines levied in the last five years, not a single probe was begun by the European Commission without the help of a company self-reporting.
“While it may be that cartels would be very difficult to detect without these rules, there must be a limit to leniency,” said Kenneth Haar, a researcher at the Corporate Europe Observatory, a Brussels-based public-interest group. “The danger here is that banks start to speculate in the rules. That they happily join cartels in the expectation that they can get off the hook in the end.”
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