Banking In The Crosshairs: Investigations By Financial Regulators And Competition Authorities In The Banking Industry – Libor, Forex, What Next?

Author:Mr Benjamin Dürig

Certain episodes of benchmark manipulation (Libor, Forex, etc) have generated global doubt and concern with regards to the integrity of many benchmarks, undermining the integrity of the system and legal and commercial certainty, and resulting in major losses for investors. 1. Have the authorities from your jurisdiction proposed or adopted any measures to ensure the necessary integrity of the market and of its benchmarks, guaranteeing that they are not distorted by any conflict of interest, that they reflect economic reality and that they are used correctly? (i.e.: measures to better protect investors, reinforce confidence, address unregulated areas, and/or ensure that supervisors are granted adequate powers to fulfil their tasks)

The short answer is no.

In the aftermath of the Libor and Forex "scandals" in 2012 and 2014 respectively, the Swiss Financial Market Supervisory Authority (FINMA) sanctioned the involved banks and initiated proceedings against some of their employees (see 6 below).

Also, in connection with both these Libor and Forex manipulations, the Swiss Competition Commission (COMCO) initiated investigations against several banks (see 4 below).

Finally, criminal proceedings against several individuals who were involved in these benchmark manipulations were initiated, all of which are still pending (see 6 below).

However, no new "general" measures to ensure the integrity of the market and its benchmarks were proposed by the authorities. It appears that the existing laws and powers of the supervisors, and in particular the display of these powers in connection with the Libor and Forex manipulation cases, are deemed adequate to ensure the integrity of the market and its benchmarks.

This was made clear by FINMA already in 2013 in connection with the revision of its Circular 2008/38 on "Market conduct rules" (now Circular 2013/08), which was revised due to a revision of the Federal Act on Stock Exchanges and Securities Trading (SESTA). The revised Circular now explicitly states that, for the "purpose of assessing the assurance of proper business conduct on the part of the supervised institutions [...], the provisions on insider information and market manipulation [...] apply not only in respect of securities admitted to trading on Swiss exchanges, but also mutatis mutandis in respect of [...] trading on markets other than the securities market (e.g. commodity, foreign exchange and interest rate markets), particularly in connection with benchmarks". However, in both its explanatory and consultation reports on the new Circular, FINMA points out that the cited passage of the new Circular has nothing to do with the revised SESTA but is merely a "formulation" of its long-standing practice. In this context, FINMA explicitly refers to its handling of the Libor case, in which the manipulation of foreign benchmarks was deemed a violation of the proper business conduct requirement (see 5 - 7 below).

Under current law, the foreign exchange market is not specifically regulated in Switzerland. In comparison to trading on stock exchanges, which is regulated by the SESTA, there are hardly any legal or regulatory norms that need to be complied with. This will not change due to the Forex manipulations. The upcoming changes in Swiss financial market law (in particular the Financial Market Infrastructure Act, FMIA, which will probably become effective end of 2015 / beginning of 2016) will create uniform regulation of financial market infrastructures and derivatives trading in line with market developments and international requirements (a case of "voluntary alignment" to EMIR and Dodd Frank, see 10 below). They will not, however, have an impact on "plain" foreign exchange trading.

Finally, it is noteworthy that the relevant penal provisions in Swiss law dealing with market abuse are aimed at securities trading only but are not designed...

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