On 19th July 2016, Mark Johnson, HSBC’s global head of foreign exchange trading, was arrested along with his former colleague, Stuart Scott. Both were accused by the US Department of Justice of using inside information to profit from a $3.5 billion (£2.6 billion) currency deal.
They are accused of ‘front-running’, which is the misuse of confidential client information in respect of a substantial currency transaction to buy or sell currency on their own account before the client deal in order for them to profit from the transaction. When companies or individuals want to buy a substantial amount of currency- for example, dollars in exchange for pounds - they typically go through a broker. A large purchase can push up the value of that currency.
Specifically, the accusations are that a $3 million profit was generated by fraudulently trading currencies in advance of a client buying $3.5 billion worth of British Sterling in 2011. It is alleged that by buying the currency in advance, this caused a huge spike in its value which would have benefited HSBC at the expense of its client.
U.S. Assistant Attorney General Leslie Caldwell has said “that the defendants have allegedly betrayed their client’s confidence and corruptly manipulated the foreign exchange market to benefit themselves and their bank.”
40% of the world's currency dealing is estimated to go through trading rooms in London. There is an estimated $5.3 trillion worth of currency traded daily.
Mr Johnson has been released on $1 million bail following a preliminary court hearing on Wednesday.
HSBC said it would not be commenting on individual employees or any active litigation.
I recently discussed the allegations with Adam Parsons and Mickey Clark on their BBC morning breakfast show, Wake up to Money, on 21 July 2016. I explained that the size of the foreign exchange market has meant that there is a lack of regulation and a lack of control. The U.S seems to be taking more robust action than the U.K., it appears, as the U.S authorities are taking a much harder line in respect of pursuing individuals rather than just the companies involved.
I also explained that it would seem that the FCA are more comfortable to hand out fines rather than prosecute and that they're trying to tighten matters, but unfortunately for them it looks to be a case of shutting the door after the horse has already bolted.
Losses caused by manipulation of the forex market have been estimated to represent $11.5 billion a year for Britain’s pension holders and has also had a significant impact on importers and exporters and any business trading in foreign currency. The major banks have made multi-million pound provisions in their accounts to cover forex fines and associated litigation.