The Board of Governors of the Federal Reserve System fined HSBC $175 million for unsafe and unsound trading practices in the foreign exchange ("FX") markets during the period between October 2008 and October 2013.
In an Order, the FRB alleged that FX spot market traders at HSBC Bank, USA and HSBC Bank, United Kingdom (collectively referred to as "HSBC") (i) used customer information to conduct proprietary trades, (ii) disclosed confidential information to traders at other banks, and (iii) used multi-bank chat rooms to communicate with traders at other banks in attempts to manipulate benchmark rates and market prices. According to the FRB, oversight failures and deficient compliance procedures and internal controls prevented HSBC from identifying these activities.
The Order notes that HSBC has taken remediation steps regarding its internal controls and compliance program pursuant to settlements reached with the United Kingdom Financial Conduct Authority and the CFTC. As a result of the alleged violations, in addition to the $175 million fine, the FRB mandated the bank to institute enhanced internal controls and compliance policies and procedures, submit a written plan for and implement a compliance risk management program, and undertake other measures for ensuring adequate compliance, including additional training for employees. In addition, HSBC is barred from retaining the employees who were involved in the misconduct.
Commentary / Steven Lofchie
Historically, FX trading has not been subject to the same level of comprehensive regulation as have been the securities and futures markets. That is obviously changing with swaps regulation and with the publication of best practices standards for the FX market. See Foreign Exchange Working Group Outlines Standards for Forex Market Participants. Every institution that trades in FX should review their procedures, compare those procedures against comparable procedures in other markets, and see whether the differences are justified by the markets or whether they are a historical anachronism.
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