The US National Futures Association (NFA) has announced that Wells Fargo has agreed to pay $2.5 million to settle charges against it relating to an FX transaction that is still the subject of legal actions elsewhere. The bank neither admitted nor denied the charges in the Complaint, although as part of the settlement it acknowledges that the decision to accept the offer includes the finding that it committed the alleged violations.
The charge, that Wells Fargo failed to communicate with a counterparty “in a fair and balanced manner”, followed an investigation by the NFA’s OTC Derivatives Department in September 2017 into the 2014 USD/CAD transaction to finance the takeover of Canada’s Tim Hortons by the owners of Burger King, Restaurant Brands International (RBI).
Following a Wells Fargo investigation into the deal, several FX executives were dismissed by the bank, although three are currently in the process of suing the bank for unfair dismissal.
In its Complaint, the NFA says that the bank and client agreed the settlement price for the forward contract would be based on the weighted average of the spot trades in the original hedge of August 27, 2014, however, instead of this, Wells Fargo allegedly “devised a rate that Wells Fargo Bank thought the client would accept”. The Complaint also alleges that the bank failed to tell the client that the average rate was arbitrary and not based upon actual transactions.
The bank and client agreed an “at worse” price for the transaction, which was the biggest in the history of Wells Fargo’s FX operation, and agreed that any improvement in the execution would be split 50/50, while the bank would wear any loss if the final price was worse than the limit imposed. The Complaint states, however, that during a meeting on August 27, Wells Fargo staff, including members of the FX management team “discussed ways to maximise [the profit] on the trade” and decided to offer the client a rate two pips worse than the actual fill (amounting to an extra CAD 800,000 for the bank), thereby not fulfilling its promise to split any improvement 50/50.
Moreover, the bank failed to tell the client that it had started to fill the order before it had agreed to the forward trade, in fact it told RBI is started to fill the spot order two hours after it actually started and that the market level at time of commencement was 1.0884, whereas in fact it was at 1.0890. It also “under-filled” the order, the Complaint alleges, telling the client the order was complete when in fact it was not.
The client called the bank six days later to query Wells Fargo’s actions, based upon information it had received that the bank had been active in the CAD options market. The Complaint alleges that Wells Fargo told RBI that it had put on a “small protective hedge” by buying two-day options for $300 million and that these options expired worthless. In fact, NFA says, the bank started requesting prices an hour before the client agreed to the forward contract in $350 million, and that they did not expire worthless, instead the bank made a profit from its options trading.
In settling the order, the NFA says its investigation into the bank’s actions is now closed, however the events within the Complaint may be used if other breaches are discovered.