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Hong Kong – HKMA Announces Findings Of Its Investigation Into FX Trading Operations Of Banks.

12 January, 2015

On 19 December 2014 the Hong Kong Monetary Authority (HKMA) announced the outcome of its investigation into the foreign exchange (FX) trading operations in Hong Kong. 

This bulletin summarises the HKMA’s investigation, its key findings and the action taken by the HKMA. It also sets out recommended actions for banks in Hong Kong in light of the findings.


The investigation found one suspected attempt to influence an Asian FX benchmark fixing and a failed attempt to influence a USD/HKD spot rate, but did not find any collusion or rigging of the Hong Kong FX benchmark fixing. The HKMA also identified certain control deficiencies during its investigations stemming from communication indiscretions. It promised to continue monitoring the banks’ conduct and to follow up on findings by other regulators which may be relevant to the HKMA’s investigation. The HKMA announcement can be accessed here


A. Background


This investigation was commenced against the backdrop of investigations into FX manipulation by nearly 20 regulators across nine jurisdictions and the European Union, including the UK’s Financial Conduct Authority (FCA) and Serious Fraud Office (SFO), the United States Federal Reserve and Department of Justice, and the Swiss Financial Market Supervisory Authority (FINMA).


The HKMA began its investigation in October 2013 after receiving relevant information from banks and overseas regulators. HKMA is the first Asian regulator to confirm an investigation into allegations of FX manipulation. The FX investigation is the second investigation by the HKMA into setting benchmark rates, after its investigation into the manipulation of the Hong Kong Interbank Offered Rate (HIBOR) that concluded in March 2014.1


B. The Scope And Methodology Of The Investigation


The HKMA investigation focused on FX trading operations of ten banks in Hong Kong and their trading practices in the period from 2008 to 2013, namely whether the banks and/or their staff in Hong Kong had engaged in:


  • collusion or other manipulation of FX benchmark fixings in Hong Kong or elsewhere;
  • collusion or manipulation of FX spot rates; and/or
  • any other inappropriate activities.


The investigation applied methodologies consistent with similar investigations by overseas regulators – the banks were required to appoint independent law firms to examine over 40 million internal and external communication records (including electronic instant “chat” messages) of staff involved in FX benchmark fixings or trading operations, conduct interviews with staff and trade data analysts, then finally report their findings to the HKMA for its further review.


C. Key Findings Of The HKMA’s Investigation


Rigging Of Benchmark Rates


In its investigation the HKMA found no evidence of collusion among the banks investigated; nor did it find any evidence of the rigging of the Treasury Markets Association (TMA) FX rates in Hong Kong.2  It also found no evidence of any rigging of FX benchmark fixings of other jurisdictions apart from one suspected attempt to influence an Asian currency benchmark fixing. In that case, a Hong Kong-based trader of a bank made requests to his colleague in the overseas jurisdiction via “chat” messages to influence the benchmark fixing in order to benefit his forward position; but there was insufficient evidence to find that the trades were actually effected by that overseas colleague who received the request to rig the fixing. 


Spot Rate


As for FX trading, the HKMA also found no evidence of collusion among the banks; however, it discovered one failed attempt by a Hong Kong based-trader of another bank to influence a non-TMA USD/HKD spot rate in March 2009, at the request of a colleague in another Asian market, in order to make a gain in an over-the-counter currency option. In this case the traders were unsuccessful in achieving their intended result.


Other Issues


The HKMA also identified some internal control deficiencies in its investigation. In particular, it noted isolated communication indiscretions by traders in six banks which resulted in the possible disclosure of client or counterparty information to other banks – made for the claimed purpose of sharing information on market conditions.


While the HKMA deemed such conduct “inappropriate”, it also noted that (i) the banks in question have made enhancements to their internal controls (such as putting transaction monitoring tools in place and periodically reviewing traders’ communications) in line with international trends in the past few years, (ii) the number of communications in question was not large, and that (iii) there is no evidence to suggest FX manipulation stemming from those 


D. HKMA’s Actions 


Against The Traders


In light of the findings in its investigation, the HKMA has referred two cases above involving attempted FX manipulation, including the identity of the traders involved, to the relevant overseas authorities for any possible follow-up action. It has also required the two banks involved to take appropriate actions against the Hong Kong traders involved.


Against The Banks


In respect of the two banks whose traders were involved in the two cases of attempted manipulation, the HKMA has required the banks to engage an independent external reviewer to (i) determine the cause of the relevant attempt, including its implications on the effectiveness of the relevant internal controls and management oversight and (ii) make recommendations to ensure that such controls and oversight are adequate to prevent and detect misconduct and irregularities by traders. The banks must then report the results to the HKMA and implement the reviewer’s recommendations within a timeframe and manner agreed with the HKMA.


In respect of the six banks found to have communication indiscretions, the HKMA has required those banks (apart from banks which do not now have a FX trading desk in Hong Kong) to conduct an assessment of their internal controls and whether they are sufficient to ensure compliance with the TMA’s Code of Conduct and Practice (the TMA Code) (the HKMA and all banks that were investigated are members of the TMA), and to identify appropriate additional measures to be implemented. The banks must then also report the results to the HKMA implement any additional measures within a timeframe and manner agreed with the HKMA.


E. Recommended Actions


The HKMA has promised to closely monitor the outcome of the required actions as part of the investigation. It also noted that other investigations by foreign regulators are underway, and that there may be a need for it to follow up on their findings where appropriate.


Banks should review their internal control policies and make sure their traders and staff are familiar with both the internal controls as well as the TMA Code with regards to FX trading. FX trading and benchmark fixing are not governed by the HKMA’s Supervisory Policy Manual (unlike HIBOR or other benchmark rate submissions). Although the TMA Code, which covers FX trading, is not legally binding upon banks, it reflects international standards and best practices: compliance will show regulators that all steps were taken to follow best practice and to prevent manipulation by “rogue traders”, while non-compliance may bring not only disciplinary action by the TMA but also referral to the HKMA.


Internationally, six banks agreed in November 2014 to pay approximately USD 4.3bn in fines3 imposed by various regulators, including the FCA,4 FINMA,5 the United States Commodities Futures Trading Commission6 and the United States Office of the Comptroller of the Currency.7 A former trader from the Royal Bank of Scotland was arrested in the United Kingdom on 19 December 2014 in connection with a SFO investigation into FX manipulation. It is expected that the probes by regulators will continue for some time, and that the FX market will become increasingly regulated as a result of the 


End Notes:


  1. HKMA found that traders in one bank had attempted to rig HIBOR rate and that the bank had failed to report such misconduct to the HKMA. The HKMA announcement can be accessed here.
  2. The TMA rates in Hong Kong comprise USD/HKD spot, USD/CNY spot and (until 1 April 2014) CNY NDF rates.
  3. The banks (and fines paid) include Bank of America (USD 250m), Citigroup (USD 1.0bn), HSBC (USD 618m), JPMorgan Chase (USD 1.0bn), Royal Bank of Scotland (USD 634m) and UBS (USD 800m).
  4. GBP 1.1bn(USD 1.7bn), which is the largest fine ever imposed by the FCA.
  5. CHF134m(USD 139m).
  6. USD 1.5bn.
  7. USD 950m.


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John Siu, Herbert Smith Freehills

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Brian Tam, Herbert Smith Freehills

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