A former London-based currency trader at HSBC Holdings Plc is on trial in Brooklyn, New York, for his alleged role in a scheme that U.S. prosecutors say netted $8 million in illegal profit. The charges against Mark Johnson and a colleague were the first brought against individuals and come amid a global probe into foreign-exchange market manipulation. A conviction would be a big win for the U.S. Justice Department, which has struggled to build cases against traders and managers, and a chance to regain momentum after an appeals court in July tossed out convictions of two former bankers for manipulating the Libor benchmark rate.
1. How big is this probe?
The case follows on the international investigation into currency misdeeds that saw seven banks, including Citigroup Inc., Barclays Plc and JPMorgan Chase & Co., agree to pay about $10 billion in fines. The U.K. Serious Fraud Office closed down its own investigation into currency rigging in 2016, so the U.S. has been the sole authority to bring individual charges. Three former bank employees are awaiting federal trial in Manhattan in a separate case after being accused of using an online chat room they dubbed "the Cartel" to share information and fix currencies.
2. Why is Johnson the first to be prosecuted?
The former HSBC trader was involved in an alleged scheme that played out in December 2011, well before the broader currency probe emerged. He is accused with Stuart Scott, a former London-based head of cash trading in Europe. Johnson, who was in the process of relocating to New York for the bank, was nabbed by the FBI in July 2016 as he was about to board a flight back to the U.K. Scott was arrested in June at the request of the American government and is fighting extradition to the U.S.
3. What are the allegations?
Johnson is charged with conspiracy and wire fraud for allegedly scheming with Scott and others at the bank. He is accused of helping front-run U.K.-based Cairn Energy Plc’s plans to buy currency as part of its sale of a company unit. The U.S. says both men, knowing the company had chosen HSBC to convert the $3.5 billion in proceeds into British pounds, purchased sterling before the transaction in a process prosecutors call "ramping." Johnson then executed Cairn’s purchase in such a manner that caused the pound to jump, the U.S. says.
4. Who was hurt by this trading?
Cairn Energy, which paid a higher price for pounds when its order was executed following the recommendation of Johnson and Scott. The pound traded as high as $1.5722 on Dec. 7, 2011, before closing at $1.5710, according to data compiled by Bloomberg. More broadly, reports of this type of activity undermine confidence that non-market insiders can get a fair shake when they need to buy or sell foreign exchange. Currencies trade $5.1 trillion per day, according to the Bank for International Settlements in Basel, Switzerland, making it by far the largest financial market on the planet.
5. Could HSBC be charged?
That seemed to be a possibility a year ago, but prosecutors haven’t made a move. According to a July 31 regulatory filing, HSBC said it has been under U.S. criminal investigation over currency trading and is in active talks with the Justice Department and U.S. regulators to resolve the probe.
6. Is this a common problem in the foreign-exchange market?
It’s hard to tell. Sharing information between currency sales staff and trading desks is common. It’s fairly standard practice to pre-hedge client orders, although critics say that term is just a euphemism for front-running. Pre-hedging involves taking a position in the market, possibly using futures or options. That can protect the currency trader if the market moves and the customer protests about having to overpay. Currency customers have also complained about price mark-ups, commissions and a lack of overall transparency.
7. What has been done to address this behavior?
HSBC paid a $618 million fine to U.S. and European regulators for its role in the overall scandal. There’s also been a monumental cleanup effort in the currency markets after the scandal. Industry participants and central bankers spent two years creating the FX Global Code, published in May. The 75-page code includes guidelines on ethics, governance, execution, information sharing, risk management and compliance, as well as confirmation and settlement procedures. Critics point out that the code is voluntary and therefore lacks teeth.
The Reference Shelf
- The HSBC front-running may have involved 11 bank employees in addition to Johnson and Scott.
- Bloomberg Intelligence’s tracker on FX antitrust suits.
- The Bank for International Settlements’ Triennial Central Bank Survey of foreign exchange.
- The FX Global Code of Conduct and a QuickTake Q&A explaining it.
— With assistance by Tom Schoenberg