I have been reading through the application for bail lodged by Mark Johnson’s lawyers following his conviction and sentence to two years’ jail and while I understand the job of the counsel is to make the best case they can by stretching facts to the limit, my natural reaction is that something went badly wrong during the trial for it to end up the way it did.

Of course the defense counsel is going to push certain, targeted, facts, just as the prosecution does, but to read in the appeal document that, “…as Johnson disclosed and Cairn repeatedly acknowledged, the bank would earn its profit, if any, by purchasing pounds ahead of the “fix” time…” one has to question how the jury could feel that he misled the client, which was one of the key findings?

The defense also believes the jury misunderstood the relationship between Cairn and HSBC and that there was no fiduciary or advisory role on the part of the latter – again one of the core tenets of the prosecution case.

The bottom line in this case remains, as I have long held, the veracity or otherwise of using the Fix. Cairn’s advisors, Rothschild & Co, narrowed the option down to two styles, risk transfer – at a premium of 100 points to the market – or execution at the Fix. Much has been made of the choice not to go at 4pm, and again previously I have stated how this is sensible because there is too much noise around that Fix, but it is interesting that Cairn, presumably on advice from Rothschild, decided to go with the 3pm Fix rather than the 11am or midday London fixes, as recommended by HSBC.

Either way, the Fix it was, and the outcome merely reinforces my prejudices against the mechanism – it is an abomination that put bank FX traders in harm’s way by leaving them no choice but to trade ahead of the rate setting, and even after the refrm process it now merely allows anyone to legally front run the rate setting using publicly available market data.

I obviously did not sit in on the trial but it still surprises me that the defense did not seek and use empirical analysis of volume/volatility levels in the FX market. 

To put it simply, if you believe the evidence for the prosecution, HSBC should not have bought sterling in front of the fixing. This is naïve and illustrates a fundamental lack of understanding of conditions in the foreign exchange market.

I have used the example before: sterling liquidity during the UK trading day is roughly GBP 100 million per minute and it is, using data form the FSB’s work on benchmark reform, something like 10 times more than volume during the Australian morning before Singapore and Hong Kong really open for business.

Anecdotal evidence is that roughly GBP 200 million caused the Cable flash crash in October 2016 happening as it did just after 10am Sydney time. Conveniently for my rudimentary mathematics ability, the Cairn order was for around 10 times that at just over GBP 2.2 billion, so I would argue, it is fair to assume (especially when explaining things to a layman jury) that the Cairn deal – had it been executed in one minute the way the prosecution appear to believe it should – would have a similar market impact?

In October 2016 Cable fell from 1.2630 to 1.1490 – let’s round things up and call it 11 big figures. Had the same happened during the Fix when the Cairn deal was executed, it would have potentially cost the firm $242 million, although of course averaging would have meant it would probably only been half that – so just the $120 million then!

The alternative, if one believes the prosecution, is to have the bank just accept the trade at the Fix rate and then manage the risk. Across the nine banks that were RFP-ed most believed it would cost between 60-120 points in slippage when buying that amount (in December – a thinner month). I’m not sure (yes, I am being sarcastic) when banks were made charities but why would a firm accept a trade for GBP 2.2 billion at a rate it doesn’t get to set, and then buy it back at a cost of, say 80 pips? After all, that’s only about an $18 million loss! It’s ridiculous to assume that any institution would accept that – what about their responsibility to their shareholders?

It worries me that a jury can come to a guilty verdict when the evidence would appear to point to several key points behind the prosecution’s case being wrong. In the evidence posted alongside the appeal, there is a transcript of Robert Scriven, then Cairn’s treasurer, stating, “As we discussed earlier, I would expect they would make money on the trade by achieving an average price on what they bought.” In other words, he was fully aware the bank would be pre-hedging.

I would also note, in the evidence, a transcript in which Mark Johnson tries to make the point?that while the 4pm Fix looks optimal, “…my view is that it is a bit of an illusion caused by the fact that there is just more business going through at the fix, and it is not necessarily good liquidity.”

This does not sound like someone who is deliberately seeking to harm a customer, rather it reads to me like a man trying to warn the customer (possibly through the advisor at Rothschild) of the potential pitfalls around the Fix.

Importantly, the appeal focuses in part on the inability of the prosecution to explain when trading ahead of the Fix becomes criminal. The document states, “The government cannot seriously claim that fix transaction are inherently criminal or that banks are not entitled to profit from fix transactions, but it articulates no standard for determining how banks can legally execute a fix transaction or how much profit is “too much”. Such a vague and arbitrary proscription leaves foreign exchange traders and banks with no standards for how to confirm their conduct to the law.” 

One of the key strategies of the prosecution was to use the “Right to Control” theory which basically asserts that the accused used false or misleading statements that was aimed at depriving the victim of the information necessary to make a discretionary economic decision. It seems clear to me that at some stage at least Johnson went out of his way to give the client (or their advisor) the fullest possible picture, so how did Right to Control get proved? I can’t see it.

As noted earlier, it is inevitable when one reads these documents that one side of the argument is presented, but to me the use of the Fix is at the centre of the issue and this merely highlights the inappropriate nature of the mechanism. What started as a reference rate has become so much more important, and led to changes by the authorities in how it is conducted that have, in turn, allowed dozens of firms in the market to legally front run the Fix based upon their own observations of public market data.

This is nonsensical either way, but it is one thing when companies are not getting best execution because of hidden slippage, it is quite another when some unfortunate is sentenced to jail. I repeat what I said upon news of the sentence, Johnson is neither a threat to society nor is he likely to re-offend – he should not be going to jail. 

There are still aspects of this case that worry me, not least the allegation that several HSBC staff were long sterling ahead of the transaction and squared up shortly after, but that is not necessarily the fault of one man – it is, again to repeat myself, a cultural issue.

Some of the language used in recorded conversations also doesn’t help – unfortunately it is inevitable that comments such as the “Christmas” line stick in the minds of jurors – nor does the muddying of the waters inferred with the claims of false stories around a Russian buyer.

It is hard not to suspect that Johnson was also a victim of the wider world’s need for a scapegoat for all the financial ills visited upon the global economy over the past 10 years. Whether that is fair or not is irrelevant sadly, it is how it is – bankers are not popular.

By lodging the appeal, however, a lot of these emotions are taken out of the equation and the case will be judged on more focused points of law alone.

From my perspective, it will be interesting to see how the prosecution reacts to the arguments that Johnson tried to warn Cairn against using the Fix, informed them – and they implicitly understood – that HSBC would be buying ahead of the Fix; and that there was no fiduciary responsibility on the part of the bank.

I would also love to hear their response to analysis that actually executing the order in a fashion as the prosecution appears to have thought it should been, could have seen the market move 10 or more big figures. We didn’t have the appropriate level of sophistication in pre-trade analytics when the trade was executed but we do now, and I for one would be fascinated to see what that (independent) analysis would show.


Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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