Big banks in the U.S. and Europe are stockpiling billions to pay for a potential trans-Atlantic settlement of allegations that they manipulated foreign-exchange rates as talks heat up with regulators on both continents.
The possibility of a major deal soon, instead of the firms settling with regulators one by one, is a new wrinkle in the long-running talks to settle foreign-exchange probes that have ensnared about a dozen banks in the U.S. and Europe.
Several people familiar with the discussions said banks appeared more optimistic of reaching a global settlement than U.S. regulators. One person said the direction of the talks was changing by the hour.
Some of the people familiar with the matter said they are skeptical that all the U.S. regulators will go for a settlement alongside their U.K. counterparts. Among the U.S. agencies, there are varying degrees of enthusiasm for one big deal: The Justice Department, in large part because it is handling criminal probes of the conduct, expects resolutions of its probes to take months more, some of these people said.
New York-based Citigroup Inc. on Thursday said it had to set aside an extra $600 million in legal provisions over what it had already budgeted for the third quarter. The bank said the extra expense was a result of “rapidly-evolving regulatory inquiries and investigations.”
The increase is tied to the foreign-exchange probe, according to people familiar with the matter. Citigroup disclosed Thursday that the U.S. Justice Department, the CFTC, the U.K.’s Financial Conduct Authority and the Swiss Competition Commission are looking into its foreign-exchange business. Citigroup said it is cooperating with the probe. Citigroup had previously reported net income of $3.44 billion, but it lowered this figure to $2.84 billion, knocking its earnings per share from $1.07 to 88 cents per share.
The investigations into allegations of improper behavior by currency traders have been looming over banks for months. But, in recent days, some U.S. and U.K. regulators have been moving to consolidate the settlements, a shift supported by the banks, according to people familiar with the matter.
The change in the settlement discussions occurred three or four days ago, in large part due to encouragement from the Federal Reserve and U.K. regulators to fast-track the talks and bring the sides together, these people said. But the settlements may not shake out before the end of this year, and the talks are still in the early stages and could collapse, these people said, since they involve multiple agencies and several banks with diverse agendas.
Some banks were told their individual settlements could range between $500 million and $1 billion, but that those numbers could easily change, one of these people said.
The banks would prefer to settle together, because it would allow them to air their bad news all at once, the people familiar with the matter said. Some regulators also would prefer to settle the matter relatively soon, these people said, and are worried it will reflect poorly on them if other agencies settle first.
In recent weeks, Justice Department officials have ramped up pressure on the banks to cooperate and account for their alleged misconduct in the foreign-exchange markets, according to a person familiar with the talks. Negotiations are still in their early stages and no settlement figures have been reached, the person said.
The Wall Street Journal previously reported that the Justice Department has been focusing its investigation on bank sales staff. The regulators have been trying to discern whether the banks were misleading customers about pricing, the Journal reported.
While British authorities are seeking resolutions of their foreign-exchange cases in November, that is a faster schedule than the U.S. agencies envision, people familiar with the matter said. There is a chance one of the banks could settle with the U.S. agencies before next year, but officials increasingly expect any U.S. settlements would come in 2015, these people said.
Citigroup is part of a group of U.S. and European banks that are in advanced discussions with the U.K.’s finance regulator toward a settlement on similar issues. The foreign-exchange probes have led to the suspension or firing of more than 30 traders at about a dozen banks, including Citigroup.
In the U.S., the Fed, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission are speaking to a group of banks, including Citigroup, Barclays PLC, and J.P. Morgan Chase & Co. about the settlement. Those banks and others, including HSBC Holdings PLC, UBS AG, Deutsche Bank AG and Royal Bank of Scotland Group PLC, are in talks with U.K. regulators, these people said.
The banks have all said they are cooperating with the probes.
In its original earnings report earlier this month, Citigroup said its quarterly legal expenses jumped 40% to $951 million from the previous year. That same day, J.P. Morgan—which is also in discussions with regulators about allegations of foreign-exchange rigging—said its legal expenses had risen about $400 million from the prior quarter. Thursday’s disclosure at Citigroup takes the bank’s quarterly legal provisions to more than $1.5 billion.
Barclays on Thursday set aside an extra $800 million in legal provisions and confirmed it was for the investigations into alleged manipulation of the foreign-exchange market. Barclays has said it is cooperating with investigators.
Investors will be watching closely for more disclosures from other banks in coming days, from the Royal Bank of Scotland’s earnings results Friday to the coming quarterly filing by J.P. Morgan, the largest U.S. bank by assets.
The Barclays provision is the first time the bank has set aside money to cover the foreign-exchange probes. As of June 30, the bank had about £2.6 billion ($4.2 billion) set aside to cover customer redress and litigation.
The initial probes were propelled, in part, by a separate inquiry into allegations employees at numerous banks rigged the London interbank offered rate, the interest-rate benchmark also known as Libor. As banks struck deals to cooperate in that probe, their assistance produced new leads on possible manipulation in currencies, these people said.
The escalation of the forex probe, which began last year, is a contrast to the investigations into Libor manipulation, which have dragged on for more than five years.
—Jean Eaglesham and David Enrich contributed to this article.
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Big banks are demanding that their law firms do more to protect sensitive information to ensure that they don’t become back doors for hackers.
Once given special status as trusted third parties, lawyers, particularly those who get access to sensitive bank information, now are more likely to get full background checks. The number of compliance checklists for law-firm technology systems and security procedures has ballooned. And law firms big and small increasingly are getting on-site audits to check who has access to documents and office servers.
A spate of cyberattacks has sharpened financial institutions’ focus on security when dealing with outside law firms, said Varun Mehta, a vice president at Clutch Group LLC, a legal and compliance consulting firm that works with global banks. “Every bank has changed from a year ago,” he said.
J.P. Morgan Chase & Co., Morgan Stanley , Bank of America Corp. and UBS AG subjected outside lawyers to greater scrutiny even before financial institutions were victims of cyberattacks this summer, people familiar with the matter said.
The demands come as financial regulators are paying more attention to third-party vendors. Benjamin Lawsky , the superintendent of New York state’s Department of Financial Services, last week sent a letter to dozens of banks requesting information on security risks relating to law firms, accounting firms and other third parties.
Law firms “can have access to a very large volume of sensitive data on a recurring basis and that makes them a point of vulnerability,” Mr. Lawsky said.
A data breach this summer at J.P. Morgan, which compromised contact information for about 76 million households, highlighted financial institutions’ vulnerability to cybersecurity attacks. That incursion isn’t believed to have originated with a third-party vendor, however.
Big law firms with financial-institution clients were already subject to some security requirements, such as limiting access to certain documents or having policies in place to guard against cyberattacks. But like government contractors or retail payment-system providers, law firms increasingly are seen as potential weak links. Clients often entrust them with everything from valuable trade secrets to market-moving details on mergers and acquisitions.
‘It doesn’t take a genius to walk into an unsecured office and walk out with printed information or a laptop.’
—Jim Darsigny, chief information officer, Brown Rudnick
Law firms now are being asked to have their own vendor-security programs, to prevent data from leaking out through third-party contractors the lawyers hire, such as word-processing firms or print shops.
“It’s a lot more than just checking a box,” said Lorey Hoffman, chief information officer at law firm Goodwin Procter LLP. “I walk through our data centers into the [server] cage with examiners” sent by clients. The firm also enlists outside auditors to test its defenses and runs internal checks of system strengths and weaknesses.
Such programs don’t come cheap. Banks generally foot the bill for their on-site audits of law firms. But the firms must invest in technology and software upgrades. Another cost: hiring staff to maintain systems and train lawyers and employees on minimizing risk.
Reliable and consistent data on law-firm data breaches don’t exist, so it is hard to say how frequently hackers target law firms. But 14% of respondents to an American Bar Association technology survey said their firms had experienced some type of security breach or theft this year. Just 1% said it resulted in unauthorized access to sensitive client data.
“Our external-facing Internet sites are probably getting hit 400 to 500 times a week” by third-party bots or denial-of-service attacks, Mr. Hoffman said. “That kind of activity is the new normal and it’s hitting everybody.”
Such attempts are common enough that the CBS television show “The Good Wife” this month included a story line in which a hacker used an email phishing scam to seize control of files at the title character’s law firm.
Some firms instruct attorneys not to open documents sent via email unless they are in a secure environment—in the office, or using a firm laptop on an encrypted line. For particularly sensitive matters, firms might restrict work to stand-alone computers that don’t connect to the Internet, said Mary E. Galligan, a Federal Bureau of Investigation veteran who now is a director of cyberrisk services at consulting and accounting firm Deloitte & Touche LLP.
Mobile devices are a particular focus. Many firms can wipe data from smartphones and laptops that are lost or stolen, and most firms install some level of encryption.
Law firm Davis Polk & Wardwell LLP in recent weeks added a new precaution: Lawyers must have a special application installed on their smartphones to open attachments sent to their firm addresses.
Hedge funds, private-equity funds, technology startups and manufacturers also are asking more questions about security, said Jim Darsigny, chief information officer at law firm Brown Rudnick LLP.
“The skills to hack into a data network are not easy to come by,” Mr. Darsigny said. “But it doesn’t take a genius to walk into an unsecured office and walk out with printed information, or a laptop. There is always a way in.”
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J.P. Morgan Chase JPM +0.77% & Co. is cutting hundreds of technology support employees in its corporate and investment bank as part of an overall push to trim expenses as the bank battles sluggish revenue, a person familiar with the matter said.
The layoffs come as the nation's largest bank by assets continues to work on streamlining its technology systems, which became unwieldy after its acquisitions of Bear Stearns Cos. and Washington Mutual Inc. WMIH +0.74% during the financial crisis, this person said.
J.P. Morgan's revenue has fallen at least the past few quarters compared with the year-earlier period. For the most recent period ending June 30, revenue declined 3% to $24.45 billion compared with the year-earlier period, according to its earnings report.
The Wall Street Journal earlier reported J.P. Morgan's Chief Operating Officer Matt Zames has been working the past few months to cut expenses, which include relocating employees, such as technology support specialists, to less-expensive office space.
"We continue to be focused and diligent on managing expenses and operating as efficiently as possible across our businesses," Chief Financial Officer Marianne Lake said on the company's most recent earnings call in mid-July. Ms. Lake added that Daniel Pinto, who heads the corporate and investment bank, is "being as diligent as you would expect him to be given the environment."
"We're going to be smart about the actions we take on expenses in order to make sure that we protect the franchise," she said, "but that doesn't mean that we can't and won't be more efficient across the businesses."
Bloomberg earlier reported the employee cuts.
Authored by Emily Glazer via wsj.com.