Citi’s “Fat Finger” Problem and What it Means for FX

A New York judge has ruled against Citi in its efforts to recover $893 million it paid by mistake to creditors of Revlon due to a “clerical error”. The judge decided that erroneous transfers are “final and complete transactions, not subject to revocation” after the bank mistakenly paid the full outstanding debt to creditors, rather than just interest on the debt.

This is an interesting finding in many ways, not least it now seems that the recipient of a genuine payment error can keep the money – the judge also stated that the recipients were “justified” in believing the payments were intentional.

This begs the question, what would happen in a New York court if, for example, someone sued to avoid an FX trade being re-papered?

If we look at SNB Day, would the judge, using the same logic, decide that a professional counterparty selling EUR/CHF at 0.2 knew exactly what they were doing and therefore the trade should stand? Would the same logic hold at the now infamous trade near zero on that day? It could be argued that rationally the only way EUR/CHF goes to zero is if the European Union ceases to exist as a political and economic beast, but is that rational enough to void the trade?

The re-papering of trades goes on more than is generally realised, although often the two parties know there has been a mistake and are happy to correct matters, but what happens if one side disagrees? Last year, what was then CFH Clearing, lost an appeal against a decision that ruled that Bank of America Merrill Lynch did not have to repaper trades from 0.75 to 0.85, the “official low”. What is overlooked is that CFH actually sold EUR/CHF, according to the court documents, at just above 0.20 and 0.14 and they had already been re-papered once.

If you take the logic of the latest judgement from New York then the original trades should have stood. The CFH/BAML case is merely the most public instance, as many of us can recall, the FX market went into something of a trauma post-SNB, not least because of the furore over re-papering.

While the EUR/CHF flash event did go to ridiculous levels and was unjustified, there were also calls on the part of some participants to re-paper trades in the Cable flash crash of October 2016 – how would those calls go following this week’s decision? The UK was coming to terms with the recent Brexit vote, Sterling was under pressure and whilst the move was ridiculously quick, 1.15 was not seen as unreasonable by many market commentators when seeking a target level for Cable. In those circumstances, a market maker hit at, for example, 1.10, would be, to use the judge’s word this week, “justified” in believing the seller wanted to hit that bid. Even on SNB Day, you have to ask the age-old question, “if you didn’t want to sell there, why hit the bid?”

If judges are not going to accept the need for revoking non-obvious or subjective errors, the FX industry is in an interesting place where it is very much relying upon goodwill to correct errors, genuine or otherwise.

There is a sense, and this may not be justified, that the prime-of-prime/retail aggregators are to the forefront in many of these flash moves, which is not all that surprising as they have automated margin calls and there was a lot of media attention on this space at the time. There could, therefore, be some justification for arguing the counterparty was not a professional player, but this flies in the face of the marketing where a lot of these firms claim to have “institutional” clients.

Whichever way one looks at it, and accepting that a “fat finger” payment is different to a “fat finger” trade, it would not be surprising if a few people in the FX industry shift uncomfortably when they read the Citi verdict, for this means that judges in the two largest foreign exchange centres in the world have found that re-papering payments or trades is wrong.

There are going to be those that will argue that once EBS Market and Matching have established their high/low, then legal agreements cut in, and that is fine. What happens, however, as is believed to be the case on SNB Day, the rules for establishing that high/low are by-passed or ignored (even with the best and most honourable of intentions)?

If judges are not going to accept the need for revoking non-obvious or subjective errors, the FX industry is in an interesting place where it is very much relying upon goodwill to correct errors, genuine or otherwise. The litmus test for this framework will occur when FX has another event, as it probably will. What happens when one party decides they don’t want to re-paper? One thing is for sure, this week reinforced doubts over the value of going to the legal system to seek redress.