There was an interesting line in a report in yesterday’s Handelsblatt discussing the impending lawsuit against the banks in Europe and the US. We, along with other news organisations, reported the impending European lawsuit at the time the US papers were filed (although it did apparently come as a surprise to some outlets who reported the European case “exclusively” one week later!) but the Handelsblatt report has a quote from a source at one of the plaintiffs that I found quite insightful and potentially signals a nightmare for the banks facing the case.
Put simply it said, “To protect the interests of our clients, we had to file a suit against the accused banks, otherwise we would make ourselves legally vulnerable.”
I read this as saying that although the plaintiffs didn’t join the legal action that took place – and perhaps crucially was settled – previously, they felt they had to now bring one so that their investors didn’t ask potentially tricky questions. It’s a kind of reverse “me too” that says, “why not me?”
The looming nightmare for banks is that this triggers a domino effect in which just about everyone who has traded a benchmark fix, had an order pre-hedged, or been mentioned in an external chat, now feels they have to come to the party. I don’t know the numbers involved, but those issues could prove to be very costly in the long run.
Either way, the legal teams can do their (expensive) work on the case to get it settled but I find it interesting that these firms seem to be justifying their move as a defensive one. It also leads me to wonder whether they are starting to look nervously over their shoulder as I suggested they might start to do in a previous column. That the plaintiffs are eyeing their investors’ reaction is telling because at some stage – and it could be in any defence mounted by the banks should they choose to do so – the question of the suitability of their execution methodologies in FX may come up.
I wonder what those investors that have, apparently, driven these firms to court, would make of them using a mechanism that empirical analysis shows heightens signalling risk? I understand so much of this is about disclosures and the asset managers cover this almost as adequately as the banks (historically) failed miserably to do so, but should an investment manager not be looking to squeeze every dollar of saving out of every transaction?
Whichever way you look at this it seems someone has dropped the ball – be it the banks’ oversight teams and senior management, individual traders, or the client’s compliance framework (because it is important to note that many execution desks on the buy side want more control of their FX execution process).
So yes, we are going to have to grind through yet another legal process, and yes, we may well be looking at many more in the future, but that one line in Handelsblatt makes me think some plaintiffs may live to regret their decision not to take foreign exchange a little more seriously.