HSBC and Deutsche Bank Fined For Forex Violations In Korea

South Korea’s Fair Trade Commission (KFTC) has levied penalties on two banks in the country after finding them guilty of colluding in foreign exchange transactions. The two banks involved are Deutsche Bank and HSBC.

This is the first time that KFTC, the country’s anti-trust regulator has investigated and penalized irregular practices in the foreign exchange market. According to the KFTC, two branches of Deutsche Bank and HSBC acted together to rig a swap bidding process. In a swap transaction, two currencies are agreed to be swapped at the current spot rate.

After a certain period of time, the currencies are swapped again at the forward rate agreed upon while the contract was entered into. Swaps are often used by local companies to hedge against foreign exchange risks in their transactions.

Sales staff at both the branches participated in a foreign exchange swap bidding which was requested by a Korean manufacturing company in 2011.In a bidding process, the banks involved quote a swap price which consists of the trading price and the banker’s margin. The margin is decided based on the level of competition from other banks in the process and the price flexibility of the customer. The customer picks the best offer after reviewing quotes from all the banks.

According to the KFTC, the manufacturing company had asked banks to bid in multiple foreign currency swap transactions amounting to $88 million in the period between January 2011 and February 2012. The swaps were to be rolled-over regularly every few months.

Officials from the two branches of Deutsche Bank and HSBC colluded during the bidding process of these transactions to avoid price competition by communicating over a messenger.

They coordinated their bids to ensure they won bids on alternate occasions, agreeing in advance to price one higher than the other. For example, in June 2011, Deutsche Bank decided to set its bid price slightly higher than that offered by HSBC so that HSBC could win the bid. The collusion took place for four such bids of the company for a period of one year.

KFTC said that although the bidding process included another bank, it was not involved in the collusion. After launching an investigation, the KFTC found the two banks to be in violation of the KFTC Act and charged both banks with hindering of fair competition in the market. It has fined Deutsche Bank 13 million won and HSBC 46 million won. The KFTC added that it will continue its scrutiny of banks to identify and eliminate any signs of unfair competition in foreign exchange derivatives market.

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