The 2017 Regulatory and Examination Priorities Letter1, published by FINRA on January 4th, is a fitting reminder of the resolve of Regulators to better execute their mission of investor protection and market integrity. Although the Libor and FX scandals might seem like distant memories, Regulators have continued on the war path. We would like to share some thoughts based on work we have been involved in last year. The idea is to help lawyers and banks have a grown-up discussion and be prepared if, or rather more likely, when, the Regulator knocks at the door.

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Foreword
The 2017 Regulatory and Examination Priorities Letter1, published by FINRA on January 4th, is a fitting
reminder of the resolve of Regulators to better execute their mission of investor protection and market
integrity. Although the Libor and FX scandals might seem like distant memories, Regulators have
continued on the war path. We would like to share some thoughts based on work we have been involved
in last year. The idea is to help lawyers and banks have a grown-up discussion and be prepared if, or
rather more likely, when, the Regulator knocks at the door.
Libor and FX regulatory investigations
When one speaks about regulatory investigation, news’ headlines come to mind and two major scandals
stand out in the fixed-income space namely the Libor scandal first and secondly, the Forex scandal.
The Libor scandal: in the course of 2012 the SFO (Serious Fraud Office) opened criminal investigations into
manipulation of interest rates. Since then the regulators of 10 different countries on 3 different continents
are investigating and around 20 major banks have been named in investigation and court cases. Also there
were class action lawsuits filed by U.S. municipalities (April 2012) and U.S. homeowners (October 2012) to
follow. As a result there have been fines from CFTC (Commodity Futures trading commission), DoJ
(Department of Justice), FCA (Financial conduct authority)… with a record fine - for interest related cases
- of USD 2.5 Bln towards Deutsche Bank in April 2015 and criminal matters against 2 individuals
The forex scandal: it involves front running client orders and rigging the FX benchmark WM/Reuters
rates. At least 15 banks disclosed investigations by regulators and about 40 employees have been
suspended, on leave, fired. As a result 5 banks were fined USD 1.7 Bln on12th November 2014 - for failure
in risk management around client confidentiality, conflict of interest between 2008 & 2013 - by the FCA
and USD 1.4 Bln by the CFTC on the same day for attempted manipulation. Also the DoJ issued felony
charges and fines consequently in 2015. Last but not least there were criminal proceedings with the one
and only known arrest in relation to the scandal
After these well publisiced scandals, the expectation was that other asset classes and markets would
follow. It is surprising, in some ways, that other markets did not come under scrutiny sooner. On the other
hand, the timeline and reaction function of regulators is different and understandably slower than that of
markets. Last year, we have been involved in a regulatory competition investigation and are aware of a
market manipulation investigation in emerging markets involving a US Regulator. Given the new powers
of the FCA, in competition matters, we believe this should be rightly on the radar screen of banks in the
UK.
1 http://www.finra.org/industry/2017-regulatory-and-examination-priorities-letter
Regulatory competition investigations
FinGuard Advisory LLP 16/01/2017 Number 4

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The dilemma faced by banks under investigation
Given the practices and culture that were pervasive in the financial markets pre the global financial crisis,
it was only a matter of time before other markets / asset classes / business areas come under the spot light
and attract the attention of Regulators. Given the arcane nature of markets and the wrath and success of
Regulators, it is at times banks themselves who blow the whistle. Banks understand very well the notion
of first mover advantage. It is no surprise that once banks come across any malpractices during the course
of internal investigations, they are keen to come clean and spill the beans. The challenge is then for the
other banks who had the misfortune to have been embroiled in these cabals. For such banks, the dilemma
is two-fold. The Regulator most likely knows more about the misdemeanors of their staff than they do at
this early stage. Trying to refute it and plead ignorance – an understandable and instinctive reaction from
senior management – is both futile and a non-starter. More importantly, the challenge is to ensure that
whatever findings they come up with, as a result of their investigation, is deemed as “adding value” to the
Regulator and hence hopefully help their plea for leniency.
Regulator’s approach
The Regulator’s approach is characterised by two interesting positions:
i) The behaviour and actions of the bankers under scrutiny will be judged / assessed on the basis
of current norms and standards instead of those prevailing at the time of the alleged offenses.
Moreover, the fact that everybody else was behaving in that way at that time does not make it
acceptable.
ii) Intent to do harm is sufficient. Evidence of successful attempts or profit from such actions is
irrelevant and does not matter. In other words, as long as it can be demonstrated that there was
intent to manipulate a market, that is sufficient. It does not matter whether the parties involved
were successful or actually benefited from such actions; neither is the quantum relevant.
Banks’ approach
From the banks’ point of view, although it might be tempting to shift the blame to the individuals
concerned and try to distance the senior management and the bank from such malpractices, there is a limit
to pleading ignorance. Beyond a certain point, it becomes senior management’s incompetence and failure
to exercise due control and oversight. It is almost “damn” if they do and “damn” if they don’t.
Understandably, the bank and the senior management would like to dissociate themselves from the
individuals involved in the wrong doing. They would like to demonstrate that such actions were not
institutional and not a product of the bank’s culture and business practices. The section below describes
some of the infrastructure that can help the bank achieve this objective.

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Get out of jail card: Prevention approach
The senior management would like to demonstrate that they could not have known of the improper
activities and behaviour of the staff in question. In reality what they need is to demonstrate that they had
put in place the proper process and procedures, risk, compliance and governance structures. These should
be in line with at least the regulatory requirements and ideally industry best practices. We provide below
a broad overview of the required architecture.
i) Record keeping and management information
Banks are notorious for having systems which “do not talk to each other”. Information is often
stored in silos and do not provide an overarching picture. The information should also be
retrievable so that when asked, they can access and produce the required information to show
that the information was being monitored.
ii) Compliance
Despite the significant increase in Compliance staff, it remains a regulatory tick box exercise. It
needs to evolve to serve the business and improve business efficiency and protect against
reputational risk.
iii) Risk
Risk reporting suffers from an overload of data and a lack of meaningful interpretation to give
senior management the necessary comfort that the business is being run securely.
iv) Governance
The fish rots from the head goes the saying. When senior hires do not perform as expected,
what are the escalation procedures and remedial process? Most market manipulations and
misdemeanors happen as a consequence of a “digging a hole mentality”.
Undoubtedly, the components of this architecture are already in place. However, they were not designed
to cater for the challenges of a potential competition investigation. The FX scandal has led to the use of
snoop analytics to monitor real time trade and communications in the FX markets. Such practices will
become increasing mainstream to satisfy compliance and market surveillance requirements. The overlay
to ensure the necessary quality assurance is a clever combination of existing technology and markets
intelligence. One of FinGuard’s senior associate is currently involved in such a market conduct
surveillance role. As the technology is still in its infancy, it tends to give too many false positives; hence
the need for the expertise and judgement of market practitioners.
UK FCA’s new competition powers & Senior Managers Regime
Talking to some lawyers, we gather that banks are waking up to the new powers of the FCA in
competition matters. What does a regulator do when he gets a new big stick?
Banks who can demonstrate that they have the adequate infrastructure in place should see it as a first
mover advantage. We would be happy to assist in approaching jointly banks for a preliminary discussion
to conduct such a review. In fact we are hearing through the grapevine that some banks are talking about

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This newsletter has been prepared by FinGuard advisors, all rights
reserved. The information contained is being provided freely and is
purely informational. It does not contain definitive advice
Please contact Guillaume CHEMIN for any follow-up
guillaume.chemin@finguard.co.uk
closing down some profitable business units, especially in the algo space, because the senior manager is
refusing to sign on the dotted line.
Talk of such a prevention approach, for when the regulator knocks at the door, is now less likely to fall on
deaf ears. No senior manager would want to play whack-a-mole or rather “whack-a-banker” when the
Regulator has a new big stick.
Update on a case we worked on in 2014:
We worked on a litigation involving a Structured note linked to inflation in
Argentina and the role of the Calculation Agent. In February 2015 Justice
Burton2 returned a judgement in favour of the Defendant. The Claimant
appealed. The Appeal Court3, in December 2016, dismissed the appeal
(three / nil). Jaya Patten was mentioned in the conclusion of Lord Justice
Hamblen.
2 www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Comm/2015/463.html&query=metlife&method=boolean
3 http://www.bailii.org/ew/cases/EWCA/Civ/2016/1248.html