Forex Trading Probes: What Is The Legal Position Of The Individual?

Forex trading cases are back in the headlines after record settlements by a group of banks with UK and U.S. authorities. The best coverage is in the FT (subscription required).

We commented in a briefing a few months ago on the approach of the authorities, especially the FCA, to allegations of benchmark manipulation. The trends identified there seem to be playing out: very large penalties based on what were, in essence, failures of supervision and, sometimes, of ethics.

A feature of the cases is that it's very difficult to identify concrete losses to customers, and the settlement agreements don't really try. The banks may have felt they had little choice but to plead guilty and sign up to yet further compliance work, as well as a period of probation. The fines have been seen as a success for the FCA, DOJ and other regulators. Martin Wheatley, the head of the FCA, has said that the heavy fines have had a positive impact on conduct within the financial services industry.

There has been plenty of commentary in the UK media of the 'why is no-one going to jail' variety. However, in the UK at least, the legal position of individuals is somewhat different from that of the banks. It's worth remembering a few key points:

There is no law against attempting to profit from movements in financial markets. Moreover, if someone wants to add some margin to the price he quotes, he is entitled do so, unless he has previously made a clear promise not to or is under some other sort of fiduciary obligation. The spot forex markets, especially euro/dollar, are the largest and most liquid in the world. They are not regulated. A trader's counterparty (who will almost always be a very sophisticated entity) will generally know if a quote is out of sync with the market and can very...