on May 22, 2015 at 3:55 PM, updated May 22, 2015 at 3:56 PM
As a condition of their probation, all the banks that pleaded guilty to a conspiracy to rig foreign-exchange rates have to send sad little “Disclosure Notices” to their clients. JPMorgan’s disclosure notice, which on a cursory glance seems to be identical to the one attached to its plea agreement, is an interesting document. There’s an introductory paragraph, and then a paragraph of contrite moaning that “conduct by certain individuals has fallen short of the Firm’s expectations,” specifically by being a massive antitrust conspiracy.
Then there are three bullet points describing other naughtiness that does not rise to the level of antitrust conspiracy. Those bullet points begin:
— “We added markup to price quotes using hand signals and/or other internal arrangements or communications.”
— “We have, without informing clients, worked limit orders at levels (i.e., prices) better than the limit order price so that we would earn a spread or markup in connection with our execution of such orders.”
— “We made decisions not to fill clients’ limit orders at all, or to fill them only in part, in order to profit from a spread or markup in connection with our execution of such orders.”
You might read these sentences as admissions of guilt, or disclosures of crimes, or even apologies. I read them as confessions and was puzzled because, while they seem like sharp practices, they don’t quite seem like crimes.
But those bullet points are actually introduced by the phrase, “The Firm has engaged in other practices on occasion, including:” That means these are not crimes, just “practices.”
And the disclosure notice merely describes them. It never says “and those practices were wrong.” Or “and we’re sorry we did those things.” Or even: “and we’ll stop doing them.”
Because they won’t! Here’s the beginning of another letter (not a condition of its probation) that JPMorgan is sending to clients:
“The purpose of this letter is to clarify the nature of the trading relationship between you and the Corporate & Investment Bank at JPMorgan Chase & Co. and its affiliates (together, ‘JPMorgan’ or the ‘Firm’) and to disclose relevant practices of JPMorgan when acting as a dealer, on a principal basis, in the wholesale spot foreign exchange (‘FX’) markets. We want to ensure that there are no ambiguities or misunderstandings regarding those practices.”
That does not sound like an apology. That sounds downright feisty. The disclosure notice, which JPMorgan has to send, starts with an apology and then goes on to list some things that JPMorgan did in the past. The client letter, which JPMorgan wants to send, starts with a defiant “no ambiguities or misunderstandings” and then goes on to list some things that JPMorgan will keep doing in the future.
Did you guess that they’re the same things? Of course you did! (Minus the antitrust conspiracy of course.)
The Justice Department didn’t like that JPMorgan, and most of the FX-manipulating banks,”added markup to price quotes using hand signals and/or other internal arrangements or communications.” So JPMorgan must tell clients:
“In certain instances, certain of our salespeople used hand signals to indicate to the trader to add markup to the price being quoted to the client on the open telephone line, so as to avoid informing the client listening on the phone of the markup and/or the amount of the markup.”
The idea here is that clients wanted to get a price directly from the trader, thinking that that might be an “objective” or “best” price, without the salesperson’s added markup. So the salesperson talked to the trader while the client was on the phone, so the client could hear what the trader said. But the clients’ phones don’t have video, and meanwhile the salesperson was frantically pantomiming “ADD A BIG MARKUP” to the trader.
Here’s how JPMorgan removes ambiguity Friday:
“Unless otherwise agreed, any firm or indicative price quoted by JPMorgan to a counterparty is an “all-in” price, inclusive of any markup above the price at which JPMorgan may be able to transact, or has transacted, with other counterparties, regardless of the circumstances under which a counterparty receives or overhears a price. JPMorgan’s sales and trading personnel are not obligated to disclose the amount of revenue JPMorgan expects to earn from a transaction, nor are they required to disclose the components of JPMorgan’s all-in price. While we do not have any duties to disclose to a counterparty any mark-up included in the order price, we will be truthful with the counterparty if we make a disclosure about whether and how much markup is included in the price.”
JPMorgan is making clear here that, if you demand an open line so you can hear the quote directly from the trader, the salesperson might still be doing an interpretive dance on the other end.
“It should be expected that JPMorgan’s sales, trading and other personnel will consult, including with respect to a counterparty’s interests, trading behavior and expectations, markup, spread, and any other relevant factors, on a need-to- know basis in order to manage JPMorgan’s market-making positions, and for the benefit of JPMorgan’s trading positions and the handling of other counterparty transactions.”
Of course salespeople and traders talk to one another! The salesperson’s job is to help the trader understand how to price a trade for a particular client. If the salesperson thinks it’s in the bank’s interest to add a markup — that is, if the salesperson thinks that the client is not particularly price- sensitive and will not trade away if the price is too high — then the salesperson’s job is to inform the trader. Obviously the client’s job is to prevent the salesperson from informing the trader. It’s a competitive game. And obviously JPMorgan’s job — now — is to inform the client that this is a game its salespeople intend to win.
Then there’s the limit order. From the second bullet point of the disclosure notice:
“For example, if we accepted an order to purchase ?100 at a limit of 1.1200 EURUSD, we might choose to try to purchase the currency at a EURUSD rate of 1.1199 or better so that, when we sought in turn to fill the client’s order at the order price (i.e., 1.1200), we would make a spread or markup of 1 pip or better on the transaction.”
And the third:
“For example, if we accepted a limit order to purchase ?100 at a EURUSD rate of 1.1200, we would in certain instances only partially fill the order (e.g., ?70) even when we had obtained (or might have been able to obtain) the full ?100 at a EURUSD rate of 1.1200 or better in the marketplace. We did so because of other anticipated client demand, liquidity, a decision by the Firm to keep inventory at a more advantageous price to the Firm, or for other reasons.”
This would be a no-no for a stockbroker, who acts as an agent purchasing stock for the client. If you are working a client limit order as an agent, you have a duty of best execution to pass on the best price to the client, even if it’s below the limit price, and if you can get the stock at the limit price but not below it, then you need to try to fill the client’s order.
In foreign-exchange trading, where banks operate as principals (trading with the clients) rather than as agents (executing on behalf of clients), JPMorgan — and all the other FX manipulator banks– seem to have thought that they had a rather weaker duty of best execution, and were not required to fill a limit order if it wouldn’t be profitable for them.
Guess what? They still think that!
“When JPMorgan is willing to work a counterparty’s “order” (as such term is used herein) at a price (such as a limit order), JPMorgan is indicating a willingness to attempt to enter into the trade at the price requested by the counterparty. Unless otherwise specifically agreed, JPMorgan will exercise its discretion appropriately in deciding whether to work an order, which orders it would be willing to execute, when it would be willing to execute them, and how it would execute them, including whether to execute all or part of the order unless we have otherwise expressly agreed to different terms of execution. As such, JPMorgan’s receipt of an order or any indication of working an order received from a counterparty does not create a contract between the counterparty and JPMorgan that commits the Firm to execute any or all of the order in any particular way.”
I’ve used JPMorgan’s client letter as an example, but these are universal practices and it looks as if they will continue universally. Now they will just be explained a little better.
Whenever a wave of bank scandals breaks, an important theme is always the mutual incomprehension of regulators and the public, who find the banks’ behavior obviously abhorrent, and the banks who are like, “What? This? We’ve done this forever. We thought it was fine.” By now we know how that tension is always resolved: The regulators are always right, the banks are always wrong, and the banks agree to pay big fines and install monitors and so forth. But the banks always go off and grumble that things weren’t as bad as all that.
Here they’re doing that grumbling in letters to clients – the day after their guilty pleas. There is no promise of reform here: Justice caught them and fined them billions but won’t stop them from doing most of those things. As long as there are no more ambiguities or misunderstandings about what they are.
It’s a weird stalemate. Justice doesn’t like these practices, the banks like them fine, and they’ve agreed to disagree. These practices have been singled out, in the context of criminal plea agreements (a bad context!), as things that happened. But not quite as crimes. And the banks are careful to make clear: They’re going to keep happening.
— Matt Levine, a former investment banker and mergers and acquisitions lawyer, is a Bloomberg View columnist.