George Haugeto, Ros han Jain, Nicholas Winkley (Group 7) Current Event Write -Up
Foreign Exchange Market Fraud
Originating as a method for persons/businesses to exchange currency when traveling or
doing business overseas, t he Foreign Exchange Market (Forex ) is a decentralized exchange
market for trading global currencies. Trading on t his primarily over -the -counter (OTC) market
occurs 24 hours a day , excluding weekends , and consists of buying, selling, and exchanging
currencies at current or det ermined prices. The four major currencies traded are the U.S. Dollar
(USD) (accounting for 87.6 % of all transactions ), European Euro (31.4 %) , Japanese Yen
(21 .6%), and British Pound (12.8 %) due to their tight bid -ask spread . The Forex market is the
largest financial market in the world, with daily trading volumes exceeding $5 trillion USD —
making it the largest and most volatile. The majority of traders in this market are institutional
investors like large international banks and commercial banks ; however, th ere are also retail
traders participating through dealers, brokers, and DMA . The importance of this market stems
from its “facilitate ion of international trade and investments through the determination of
exchange rates, conversion of national currencies , an d transfer of funds .”
Forex trading occurs through a variety of different transaction types : Spot Trading,
Future Contracts, Forward Contracts , Options, Outrights , and Swaps . Spot Trading is the
quickest transaction and accounts for ? of all Forex trading. In the Forex Spot Market,
currencies a re traded in pairs , (i.e. USD/EUR) , as a cash tra de at the current exchange rate —
normally settled within two days. Most major pairs utilize USD as either the base or quote
currency. The base currency is the first currency appearing in a pair and represents the amount of
the quoted currency needed to reach one unit of the base. The price is the ratio of r elative value
of the base currency if paid for with the quoted currency . For example , the quotation of the pair
“EUR/USD 1.2500 ” means one euro is exch anged for $1.25 USD. Financial institutio ns act as

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market makers , providing liquidity, that then trade within an inter dealer market where only
representatives of banks and other fi nancial companies conduct trades. Glossing over the
nuances of the other transaction types, these arrange the transfer of the currencies months or
years in the fut ure , typically by locking -in an exchange rate that is used for the exchange as a
specified date in the future.
Other aspects of the Forex market that are important to highlight are the ability to
lever age , trading transaction costs , and the complexity of pricing . Forex trading requires only a
small margin to purchase a contract of much higher value. This appeals to traders because of the
ability to yield high returns with minimal capital expenditure . Br oker commissions are a large
part of the Forex trading transaction costs. Broker typically use either a fixed or relative fee in
calculating their commission . In a f ixed fee , the broker charges a fixed sum regardless of the size
and vo lume of the trade bei ng placed. The more common r elative fee is based on trade size; the
larger the volume, the higher commis sion charged. Other fees include inactivity fees, monthly or
quarterly minimums, margin costs , and fees associated with phoning a broker. Finally, pricing in
the Forex market is extremely difficult because it revolves around foreign currency exchange
rates , which are affected by a wide range of economic factors. These r ates are impacted by
economic growth, inflation, interest rates, budget/ trade ba lances , political conditions, and
participant psychology . Further, global order flow s remain relatively opaque — especially to retail
traders .
Due to the above described market conditions and a history of minimal regulation , a
major issue plaguing the Forex market is fraud. The contributing m arket conditions include:
extreme volatility and market size, its global nature, the complexity of pricing and spot trading,
ability to leverage, the market being controlled by bank participants through the interdealer


market , broker moral hazard, lower profit margins compared to other investments therefore
increasing motivation, lack of execution price transparency, and lack of meaningful regulatory
Fraud cases in the Forex markets range from large financial in stitutions to small financial
advising firms and the number of people involved ranges from one person working alone to
many individuals conspiring together. The most common type of fraud perpetrated is brokerage
fraud. This is where a broker intentionally misleads their client in orde r to profit from them . On e
example is when the b roker promise s positive returns w ith no chance of a down turning (CFTC
v. Financial Risk International, Inc. ). These strategies are usually high cost and have positive
short -term gains to draw investors in, followed by long -term losses . Another way brokers engage
in fraud is by making unnecessary tr ades to collect the commission (churning) . There have also
been cases where the broker has been sanctioned for front -running the client s orders ( In re
Foreign Exch .), illegal trade assignment ( Gobora, SEC Litigation Release No. 17555 (June 11,
2002) ), Ponzi -like schemes, improper consolidation of order flows, and violation of best
execution rules ( People v. Bank of N.Y. Mellon Corp. ). The Commodities Futures Trading
Commission ‘s (CFTC ) website warns of the risks and highlights some signs for spotting a
fraudulent broker . It also provides questions to ask a broker to ensure that they are a fiduciary
and a database to search the record of a broker.
Although broker moral hazard is the most common type of fraud, larger schemes
transcending brokers have al so taken place. These schemes invo lve the actual manip ulation of
prices in the market by employees of large financial institutions. This generally i nvolves the
collusion of several employees to drive prices in a direction of their choosing. A famous example
of this is the 2015 “Forex Scandal” where five key banks: JPMorgan Chase ; Co., Citicorp,


Barclays PLC, The Royal Bank of Sco tland (RBS) PLC, and UBS AG plead guilty to felony
charges of consp iracy to rig market rates in violation of the Sherman Antitrust Act. This 5 -year
conspiracy was accomplished through exclusive online chatrooms where the banks would devise
plans to manipulate Forex pr ices, particularly prices around the daily fix (the benchmark
currency rate) . These banks would then submit a large amount of orders in the thirty -second
window before or after the fix to influence the rate, and profit from the resulting shift in prices.
As a result, regul ators imposed a $5.8 billion fine for the antitrust violations and mandated the
firing of individuals involved .
Prior to the 2008 crash, currency transactions were among the least regulated transactions
in the U.S. financial markets. Further, before the Fo rex Scandal, regulators believed the Forex
market was too big to be manipulated, negating any need for substantial regulatory oversight .
The Forex market is currently highly regulated by one of the most complex regulatory regimes .
The current regulations and regulators that govern a currency transaction are different depending
on factors including: the type of product being traded; whether the transaction is physically or
cash -settled; the type of person trading the product (institutional or retail ); and whether the
instrument is traded on a securities or futures exchange or in the OTC market . Regulators
include : the CFTC , the Securiti es and Exchange Commission (SEC) , the Office of the
Comptroller of the Currency , the Federal Depo sit Insurance Corporation , the Financial Stability
Board , the National Futures Association (NFA) , and the Board of Governors of the Federal
Reserve System . This often makes it difficult for regulators to enact meaning ful change to the
scheme . It also increases confusion over regulations because it is difficult to see wher e one
regulator’s jurisdiction starts and ends.


The first of the current regulating bod ies over Forex was the CFTC after the Commodity
Futures Trading Commission Act of 1974 , (which created the CFTC) . Despite this creation, the
U.S. Treasury Department amended the Act to exclude CFTC jurisdiction over currency
transactions conducted on the OTC market between ba nks and other institutional market
participants because “these transactions are more properly regulated by federal banking
regulators” (otherwise known as th e Treasury Amendment). This allowed dealers to avoid CFTC
jurisdiction simply by restyling their transaction instruments . F or example by using rolling spot
Forex transaction where the position is extended past the end of the tra ding day (CFTC v.
Zelener , h olding rollovers of foreign currency sales were not “contracts of sale of a commodity
for future deli very,” and the dealer’s promise did not create futures contract , thus not subject to
the CFTC ).
The large amount of fraudulent conduct in the r etail Forex market caused regulators to
revise the laws in place. The Commodity Futures Modernization Act of 2000 increased
protection of retail Forex traders by allowing only certain registered parties to be a counterparty
with a retail trader; however, this legislation did not confer the CFTC with proper rulemaking
authority and did not af fect Spot Trading or Forward Contracts.
Next, the Dodd -Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd –
Frank) implemented sweeping reform of the retail Forex market. First, Dodd -Frank allocated
jurisdiction over retail forex transactions among the SEC, CFTC and “appropr iate” federal
banking agencies. This helped to reduce the regulation and regulator jurisdiction confusion.
Second, it eliminated the broad exemptions for institutional derivatives originated from the 2000
Act. Third, it explicitly prohibit ed fraud, require d that investors be given a risk disclosure
statement, require d a $20MM minimum adjusted net capital for dealers, continue d minimum


margin requirements, require d risk assessments by dealers , and set tradin g standards. Dealers
were also required to register with the NFA and be subject to its rules. This means the entities
permitted to engage in retail Forex transactions could do so only pursuant to rules adopted by
their federal regulators .
Finally, further interpretation of these regulations and large additional amount to be paid
by fraudulent actors have taken place through enforcement actions by consumers, typic ally
through class action lawsuits suing for the perpetrated frau d. For example, the class action suit
arising from the Forex Scandal resulted in the banks paying around $2 billion in the settlements.


1. https://bizfluent.com/about -5341259 -types -foreign -exchange -markets.html
2. https://www.cftc.gov/ConsumerProtection/FraudAwarenessPrevention/CFTCFraudAdvisories
3. David Aron, P. Georgia Bullitt and Jed Doench , Regulation of U.S. Curren cy Transactions , 37
No. 5 Futures ; Derivatives L. Rep. NL 1 (May 2017).
4. https://ecmtrader.com/en/characteristics -of-fx -market/
5. https://en.wikipedia.org/wiki/Foreign_exchange_market
6. https://www.forbes.com/sites/antoinegara/2015/05/20/four -banks -plead -guilty -to-foreign –
exchange -collusion -ubs -pleads -guilty -to-wire -fraud/#6a592d1f5108
7. https://www.forexcycle.com/forex -market/121457 -5-types -of -fraud -on -the -forex -market.html
8. § 27:14.50. More forex legislation , 13A Commodities Reg. § 27:14.50 (April 2018)
9. https://www.investopedia.com/terms/b/basecurrency.asp
10. https://www.investopedia.com/terms/q/quotecurrency.asp
11. https://www.investopedia.com/university/forex -currencies/currencies3.asp
12. Jerry Markham, Regulating the Moneychangers , 18 U. Pa. J. Bus. L. 789, 842 (2016)
13. https://www.newyorkfed.org/financial -services -and -infrastructure/financial -market –
infrastructure -and -reform/managing -foreign -exchange/index.html
14. Rama Attreya, IV. Forex Scandal: Top Banks Face Antitrust Fines , 35 Rev . Banking ; Fin.
L. 34, 45 (2015)
15. https://www.trading -point.com/volatility
16. https://www.wsj.com/articles/banks -civil -forex -settlements -near -2-billion -1434541324


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