Credit Suisse AG agreed to pay a $135 million fine to settle charges brought by the New York Department of Financial Services ("DFS"). The charges relate to improper conduct in the bank's foreign exchange ("FX") business from 2008 to 2015.
As more fully described in the Consent Order, the DFS determined that Credit Suisse "engaged in improper, unsafe, and unsound conduct . . . by failing to implement effective controls over its FX business." DFS alleged that Credit Suisse FX traders shared information through electronic chat rooms to coordinate trading activity and attempted to manipulate prices and benchmark rates. This coordination, the DFS said, included the sharing of confidential customer information, and often served to reap profits for Credit Suisse to the detriment of its customers. The FX traders allegedly used these practices over a period of several years despite guidance from federal banking regulators and internal policies instituted by Credit Suisse.
The DFS found that Credit Suisse traders attempted to front-run, or trade ahead of, customer orders using confidential customer information, and that this practice was encouraged by senior management of eFX (Credit Suisse's electronic trading platform). In addition, the DFS determined that Credit Suisse traders participated in "building ammo," or coordinating with traders at other banks to designate a single trader to take on multiple orders from other participants. This practice allows traders to minimize risk and manipulate prices to the benefit of all participants.
Other alleged illicit practices included the improper use and disclosure of "last look" functionality to the detriment of customers in connection with the eFX platform. Throughout the period in which the alleged misconduct took place, Credit Suisse allegedly used "last look" functionality to reject orders based on market movements adverse to Credit Suisse without disclosing the practice to customers.
The DFS also found that Credit Suisse did not have sufficient policies and procedures in place to supervise its FX employees, and did not provide adequate corporate governance over the FX business.
In addition to the $135 million fine, Credit Suisse agreed to a series of other remedial measures, including submitting written plans and enhanced programs for improving internal controls, compliance, and audit policies and procedures.
Commentary / Jeff Robins
While much of the activity cited by the DFS was chatroom activity that has been the subject of various federal and regulatory investigations, the allegations relating to the use of "last look" functionality are noteworthy. "Last look" practices were highlighted by the media in 2014 and became the subject of several class actions (some of which have been dismissed). "Last look" also became a central and highly debated topic in the development of the FX Global Code published in May of this year by the Foreign Exchange Working Group, a group of central bank representatives and private sector market participants (see previous coverage).
Though the FX Global Code permits "last look" as a risk control mechanism, Principal 17 recommends robust disclosure regarding its use and states that trading on customer information during a "last look" window is "likely inconsistent with good market practice." Principal 17 and, in particular, the "likely inconsistent" language, has been the subject of ongoing debate at the Global Foreign Exchange Committee. A decision on whether to revise the text could be announced shortly.
Whether they have committed to the FX Global Code or not, firms that provide electronic FX trading services should monitor this space and refresh their review of "last look" policies in the light of any changes.
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