In the last few months, European regulators have launched three investigations into possible collusion to manipulate i) foreign exchange rates; ii) Supra-sovereign, Sovereign and Agency (SSA) bonds and iii) European Government Bonds (EGBs). While the investigation on SSA bonds doesn’t represent a huge threat for the banks, given the limited amount of bonds traded, lenders may face billion of dollars in fines and follow-on damage claims if they are held liable of manipulating forex rates and EGBs. Let’s take a look at each of these probes:
Forex Collusion Probe
At least seven big lenders are being investigating for allegedly rigging foreign exchange rates from 2007-2013, probably including the main currency pairs EUR-USD, EUR-GBP and USD-GBP, though this isn’t confirmed yet. Other authorities around the globe have already fined the companies more than $10 billion for currency manipulation. Additionally, settlements and damage claims in the U.S. added $2 billion more.
Credit Suisse has already received official charges (formally known as statement of objections). This is an indication that regulators have found evidence of collusion. No other bank has publicly admitted to receive official charges. It is fair to assume that companies will face an uphill road to challenging these allegations, given the precedents in other jurisdictions and the banks’ currency-rigging history in Europe.
If banks are found guilty, how big fines can be? As usual in cartel cases, the statutory limit is 10% of the company’s global turnover, yet this isn’t likely. If we look at the FX revenue generated in Europe by banks in 2012, the year before the end of the infringement, values vary across lenders from around $150 million (Credit Suisse) to almost $2,000 million (Barclays). If we include other variables like deterrence, duration and also settlements and leniency reductions, in our opinion, banks may be fine around $3-4 billion collectively.
SSA Collusion Probe
This antitrust probe is a priori the least damaging for the banks. The investigation focuses on dollar denominated SSA bonds traded in the secondary market and only at certain times. This type of bonds represent a small percentage of the total bonds traded between banks, in most of the cases probably it is just below 10% of the total revenue generated by fixed income products. Fixed income usually includes corporate bonds (debt issued by the companies to obtain funds) and government bonds (debt issued by countries or other public entities). SSA bonds are a specific type of bonds of the latter.
In order to calculate a possible fine, we need to do a number of assumptions as the data disclosed by the companies is usually aggregated. We can only find revenue for fixed income or fixed income, currency and commodities (FICC), but not as detailed as SSA bonds. Yet, even if we take 10% of the FICC revenue as the relevant revenue to calculate antitrust fines, the penalty we obtain after applying aggregating and mitigating circumstances is usually less than $100 million per lender. In summary, banks’ exposure to hefty fines is more limited in the SSA bond probe than in the other two investigations.
EGBs Collusion Probe
In January, the European Commission opened a third investigation against eight banks for allegedly rigging European Government Bonds (EGBs) in the primary and secondary markets from 2007 to 2012. The investigation is still confidential but the size of the relevant market is substantially bigger than in the SSA probe and so would be the fines, if banks are found guilty of price manipulation.
EGBs are bonds issued by central governments in the Eurozone and German bonds, known as Bunds, represent the majority of these bonds. Banks may buy EGBs in the primary market (when bonds are issued) through auctions or syndicates or in the secondary market (when bonds are traded). As an example, in 2011, the relevant year to calculate antitrust fines, the amount of Bunds issued accounted for approximately 275 billion euros (see picture below). Furthermore, according to the German Finance Agency, the volume of Bunds traded also that year, was around $6 trillion. German securities represent at least half of the EGBs, thus, it is safe to assume that the total volume traded in that year exceeded $10 trillion.
Revenues generated by banks issuing and trading EGBs may have represented in some years around 30% of their fixed income revenue, in comparison to the 5-10% from SSA bonds. Thus, the relevant revenue to calculate antitrust fines will be substantially higher and potentially damaging for some of the banks involved. Yet, possible leniency and settlement reductions could reduce lender’s exposure to fines.
