Final Notice
1
FINAL NOTICE
1.
ACTION
1.1.
For the reasons given in this Notice, the Authority hereby makes an order,
pursuant to section 56 of the Act, prohibiting Mr Terry John Farr from performing
any function in relation to any regulated activity carried on by an authorised
person, exempt person or exempt professional firm.
2.
SUMMARY OF REASONS
2.1.
The Authority has taken this action because during the period from 19 September
2008 until 25 August 2009, Mr Farr arranged nine Wash Trades in order to obtain
unwarranted brokerage payments for no legitimate commercial purpose. This
misconduct demonstrates a lack of honesty and integrity, and the Authority
therefore considers that Mr Farr is not a fit and proper person to perform any
function in relation to any regulated activity carried on by an authorised person,
exempt person or exempt professional firm.
Mr Farr’s involvement in the Wash Trades
2.2.
During the Relevant Period and whilst employed as a Broker at Martins, Mr Farr
arranged the nine Wash Trades set out at Annex 1 to this Notice in order to enable
Trader A of UBS to make unwarranted brokerage payments of £172,053.23 to
Martins for no legitimate commercial purpose.
2.3.
In the course of their dealings, Mr Farr encouraged Trader A of UBS to believe
that he was willing to attempt to influence the JPY LIBOR submissions of Panel
Banks. Trader A in return entered into the Wash Trades to reward Mr Farr for his
perceived assistance. Thus the brokerage Martins received as a result of the Wash
Trades was not in consideration for any form of legitimate service and was
unrelated to any proper purpose for which brokerage payments may be made.
2.4.
As a consequence of the Wash Trades, Martins received unwarranted brokerage
of £258,151.09 from UBS and RBS. Mr Farr knew that this unwarranted brokerage
increased the bonus pool available to him and his colleagues on the JPY Desk
during the Relevant Period. Accordingly, Mr Farr’s motivation for arranging the
Wash Trades was profit and his own personal financial gain.
2.5.
The Authority considers Mr Farr’s misconduct to be serious, and that it
demonstrates dishonesty and a lack of integrity. As a result of his lack of honesty
and integrity, the Authority considers that Mr Farr is not a fit and proper person
to perform any function in relation to any regulated activity carried on by an
authorised person, exempt person or exempt professional firm. The Authority has
therefore made an order prohibiting Mr Farr from performing any such function.
This action will advance the Authority’s operational objectives of securing an
appropriate degree of protection for consumers and protecting and enhancing the
integrity of the UK financial system.
3.
DEFINITIONS
3.1.
The definitions below are used in this Notice:
“the Act” means the Financial Services and Markets Act 2000;
“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct
Authority;
3
“Broker” means an interdealer broker employed by Martins acting as intermediary
in, amongst other things, deals for funding in the cash markets and interest rate
derivatives contracts. Broker B is the Broker at Martins referred to in paragraph
4.13;
“EG” means the Authority’s Enforcement Guide;
“FIT” means the part of the Authority’s Handbook entitled “Fit and Proper test for
Employees and Senior Personnel”;
“FRA” means Interest Rate Forward Rate Agreement;
“IRS” means Interest Rate Swap;
“JPY” means Japanese Yen;
“JPY Desk” means Martins’ Japanese Yen Desk which was created in January 2008
on the merger between the JPY Cash Desk and the JPY Forward Desk;
“JPY LIBOR” means the London Interbank Offered Rate for JPY;
“LIBOR” means the London Interbank Offered Rate, a benchmark reference rate;
“Martins” means Martin Brokers (UK) Ltd, a company which entered into
administration in December 2014 and was dissolved on 7 December 2015;
“Martins Final Notice” means the Final Notice dated 15 May 2014 issued by the
Authority to Martins;
“OBS” means off-balance sheet, referring to debts or assets that do not appear
on a company’s balance sheet. IRSs and FRAs are OBS instruments;
“Panel Bank” means a bank with a place on the panel of the administrator of
LIBOR (the British Bankers’ Association, during the Relevant Period) for
contributing LIBOR submissions in one or more currencies;
“RBS” means Royal Bank of Scotland Plc;
“the Relevant Period” means the period from 19 September 2008 to 25 August
2009 inclusive;
“Trader” means a person at a bank trading interest rate derivatives or trading in
the foreign exchange and money markets. Trader A and Trader B are the Traders
referred to at paragraphs 4.9 and 4.13 respectively;
“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber);
“UBS” means UBS AG;
“Wash Trades” means risk-free trades, with the same party, in pairs that cancel
each other out and for which there is no legitimate commercial purpose. Such
trades are also referred to as “flat switches”. The nine Wash Trades arranged by
Martins are described individually at Annex 1 to this Notice; and
“yard” means one billion (i.e. one thousand million).
4.
FACTS AND MATTERS
4.1.
Martins was an interdealer broking firm based in London that conducted business
within the wholesale financial markets. It entered into administration in December
2014 and was dissolved on 7 December 2015.
4.2.
On 15 May 2014, the Authority published a Final Notice disciplining Martins for its
role in the attempted manipulation of LIBOR and its inadequate systems and
controls. The Martins Final Notice sets out, amongst other things, that between 1
January 2007 and 31 December 2010, Martins breached Principles 3 and 5 of the
Authority’s Principles for Businesses through misconduct relating to the calculation
of JPY LIBOR.
4.3.
The Martins Final Notice also described the method which Trader A of UBS used
to reward certain Brokers at Martins for their attempts to influence the JPY LIBOR
submissions of Panel Banks, namely by entering into Wash Trades which enabled
Trader A to facilitate payments from UBS to Martins. In total, there were nine
such Wash Trades.
Mr Farr’s role at Martins
4.4.
Mr Farr’s career as a broker spanned almost 18 years. He joined Martins in August
1999 as a Broker in the Money Markets Division, where he was employed until
December 2012.
4.5.
Martins was organised into various “desks” of Brokers. The desks specialised in
facilitating trades in different currencies and financial products on behalf of its
clients. Mr Farr was initially a Broker on the JPY Cash Desk where he was promoted
to the position of Manager in January 2007. This position entailed only limited line
management responsibility in respect of other Brokers but the Authority considers
it an indicator of Mr Farr’s seniority. Subsequently the JPY Cash Desk merged
with the JPY Forward Desk to become the JPY Desk, effective from January 2008.
Mr Farr worked on the JPY Desk at Martins throughout the Relevant Period.
4.6.
As a Broker on the JPY Desk, Mr Farr was responsible for arranging trades between
institutional clients in return for brokerage. He dealt in a range of JPY products,
including JPY Cash, JPY Forwards and JPY OBS products (including FRAs and IRSs).
Remuneration on the JPY Desk
4.7.
In addition to their basic salary, Brokers at Martins were paid a bonus that
represented a percentage of net profit over a specified threshold generated on a
quarterly basis. This threshold was referred to as the ‘break-even’ target. During
the Relevant Period, 30 percent of net profit above the break-even target was
paid to the Brokers and 70 percent was retained by Martins. Unlike many desks,
the bonus pool was shared equally among the Brokers on the JPY Desk, which
included Mr Farr.
Improper relationship with Trader A
4.8.
The Wash Trades all occurred in the context of Mr Farr’s improper relationship
with Trader A of UBS.
4.9.
Trader A was one of Mr Farr’s main OBS clients during the Relevant Period. He
was an important client to Mr Farr because Mr Farr needed Trader A’s prices to
show to his other OBS clients and Trader A was a counterparty in the majority of
the OBS transactions Mr Farr brokered. Conversely, Mr Farr acknowledged that
he was not important to Trader A as a broker. Rather, Mr Farr’s importance to
Trader A arose from Trader A’s belief that Mr Farr could assist him in influencing
the JPY LIBOR submissions of Panel Banks.
4.10.
Throughout the Relevant Period, Mr Farr encouraged Trader A to believe that he
was willing to attempt to influence the JPY LIBOR submissions of Panel Banks at
Trader A’s behest. In consideration for this purported assistance, Mr Farr arranged
the nine Wash Trades to enable Trader A to make unwarranted brokerage
payments from UBS to Martins. Trader A was willing to execute the Wash Trades
in order to pay brokerage to Martins as a reward for what he understood to be Mr
Farr’s efforts to influence the JPY LIBOR submissions of Panel Banks.
4.11.
Mr Farr admitted to the Authority in interview that he lied to Trader A all the time,
including about his purported efforts to influence the JPY LIBOR submissions of
Panel Banks, in order to keep Trader A happy and to sustain the relationship
between them. Mr Farr recalled that Trader A would ask him for assistance in
attempting to influence the JPY LIBOR submissions of Panel Banks almost every
day and Mr Farr led Trader A to believe that he would act upon his requests;
however, he did not always do so and he told the Authority that when he did “go
through the rigmarole” of doing so, he did not expect it to make much difference.
4.12.
In addition to rewarding Mr Farr for his perceived assistance in attempting to
influence the JPY LIBOR submissions of Panel Banks, the Authority also identified
one instance where Trader A’s motivation for executing a Wash Trade was, in part,
to repay personal hospitality received from Mr Farr. In May 2009, Trader A stayed
at the Four Seasons resort at Koh Samui whilst on holiday in Thailand. Mr Farr
agreed with Trader A that Martins would meet the cost of his hotel
accommodation. Mr Farr claimed £3,886.22 in expenses from Martins and then
transferred this amount from his personal bank account to the personal bank
account of Trader A. In exchange for this, Trader A offered to execute a Wash
Trade with Mr Farr although, in doing so, he acknowledged that he was going to
do this on a monthly basis anyway as a reward for what he understood to be Mr
Farr’s efforts in attempting to influence the JPY LIBOR submissions of Panel Banks.
4.13.
Trader A of UBS entered into nine Wash Trades with Martins between 19
September 2008 and 25 August 2009. Broker B, a colleague of Mr Farr’s who was
also a Broker on the JPY Desk at Martins, assisted Mr Farr and Trader A in
7
achieving their objective of entering into the Wash Trades by procuring Trader B
of RBS to act as counterparty to UBS in the Wash Trades.
4.14.
RBS (through Trader B) was the counterparty to eight of the nine Wash Trades
and paid brokerage on seven out of the eight Wash Trades in which RBS
participated. Trader C of Bank A was the counterparty to the remaining Wash
Trade (Wash Trade number 2), but Bank A paid no brokerage in respect of that
transaction.
4.15.
Details of each of the nine Wash Trades are set out at Annex 1 to this Notice and
a diagram showing the mechanics of a representative Wash Trade (as compared
with an ordinary swap trade) is at Annex 2.
4.16.
The Wash Trades generated exceptionally large amounts of brokerage compared
with normal activity on the JPY Desk. The average brokerage that Martins was
paid for a typical Forward JPY trade was around £500, whereas the brokerage that
RBS and UBS paid in respect of individual Wash Trades ranged from £6,402.62 to
£52,928.46.
4.17.
Over a three-year period encompassing the Relevant Period (between 1 January
2007 and 31 December 2009):
(1)
the Wash Trades contributed to six of the nine highest grossing days by
brokerage for the JPY Desk and the other two days on which Wash Trades
occurred were ranked 53rd and 62nd respectively (out of 761 days); and
(2)
each Wash Trade accounted for at least 42 percent of daily desk revenue
and the majority of the Wash Trades accounted for a significantly greater
percentage of daily desk revenue. For example, Wash Trade number 3
accounted for 84 percent, Wash Trade number 6 accounted for 80 percent,
Wash Trade number 5 accounted for 69 percent and Wash Trade number 4
accounted for 56 percent.
4.18.
In total, the Wash Trades generated unwarranted brokerage of £258,151.09
(£172,053.23 from UBS and £86,097.86 from RBS) for Martins, and increased the
bonus pool available for Mr Farr and the other Brokers on the JPY Desk.
4.19.
Mr Farr encouraged Trader A of UBS to believe that he was influencing the JPY
LIBOR submissions of Panel Banks’ for his benefit and, on one occasion, procured
(via an expenses claim) that Martins paid for hotel accommodation for Trader A
in Thailand. In return, Trader A entered into the Wash Trades and made
unwarranted brokerage payments to Martins in respect of those transactions. The
Wash Trades had no legitimate commercial purpose and the brokerage Martins
received from UBS and RBS as a result of the Wash Trades was unrelated to any
proper purpose for which brokerage payments may be made.
Examples of the Wash Trades
4.20.
Some examples of the Wash Trades are set out below. The telephone calls below
have been transcribed by the Authority from contemporaneous audio recordings.
Wash Trade number 1 – 19 September 2008
4.21.
Shortly prior to the first two Wash Trades, Trader A of UBS explained to Mr Farr
that if he kept the six month JPY LIBOR rate unchanged that day, Trader A would
enter into a very substantial transaction in order to facilitate a large brokerage
payment to Martins.
4.22.
In a subsequent conversation later that day, Trader A explained that he would
use Wash Trades to pay extra brokerage to compensate Mr Farr for his assistance
with his LIBOR requests:
“TRADER A: […] all I was thinking if you’ve you got any mates, mate,
who’ll do you like a net trade and I could like, you know,
basically give you like fucking, I don’t know, a trillion three-
month LIBOR/TIBOR and take back a trillion three-month
LIBOR/TIBOR and, obviously, you’re net it with the other guy
[…] what I’m saying is, look, that if you’ve got a mate who
will like do a flat switch basically […] I’d go in and out with
him, yeah? So I’ll pay them in two years1 or whatever and
I’ll receive from them in two years. The coupon’s the same
[…] you don’t charge them any bro, but I’ll get charged bro
both sides obviously […] Do you want to do that?
FARR:
Yeah, I do see. Okay.
1‘Two years’ refers to the duration of the IRS.
TRADER A:
That’s the way we’re going to do it. All right?
FARR:
All right. That’s excellent.”
4.23.
In order to arrange the Wash Trades, Mr Farr needed to find a Trader at another
bank who would be willing to act as counterparty to Trader A of UBS. Accordingly,
on 19 September 2008, Broker B called Trader B of RBS and asked if he would
‘flat switch’ 150 billion JPY at a fixed rate of 1.0575 for a term of two years and,
in return, offered to send lunch round for the whole of Trader B’s desk. Trader B
agreed to Broker B’s request.
4.24.
In a follow up conversation on the same day, Broker B asked Trader B to increase
the trade to JPY 250 billion in order to generate more brokerage and disclosed
that the Trader at UBS on the other side of the transaction was Trader A. Trader
B refused to increase the trade to JPY 250 billion but agreed to an increase to JPY
200 billion.
4.25.
On 19 September 2008, Trader A entered into Wash Trade number 1, arranged
by Mr Farr. The counterparty to this Wash Trade was RBS (through Trader B).
During a telephone conversation later that day, Mr Farr confirmed with Trader A
that UBS would be paying brokerage on each of the trades comprising Wash Trade
number 1 and thanked him for it. Trader A replied “Oh mate, forget it. If you help
me I’ll help you.” Mr Farr went on to explain what percentage of that brokerage
would be paid into the bonus pool for the Brokers on the JPY Desk: “...I mean
we’re batting for ourselves at the moment so we get like 30 percent of the net
[…] so it’s good mate. […] Thanks very much”.
4.26.
Martins received £35,854.70 in brokerage for Wash Trade number 1 – £25,610.50
from UBS and £10,244.20 from RBS.
Wash Trade number 4 – 28 January 2009
4.27.
In a telephone conversation on 27 January 2009, Trader A told Mr Farr that he
would do a big two-year trade on 29 January 2009, saying that: “We’ll do bro
both sides because, you know, you really helped me out on the LIBORs this month,
mate.”
4.28.
In a subsequent telephone conversation the following day, Trader A said to Mr
Farr “Let’s just do this two-year thing today” and suggested that Broker B speak
to Trader B of RBS with a view to arranging the Wash Trade. Mr Farr then
confirmed that Trader B had already agreed to enter into the Wash Trade as
counterparty to UBS. Later in the call, Trader A requested that, in return for the
Wash Trade, Mr Farr assist him in attempting to influence the LIBOR submission
of Panel Bank A: “… In return, try and get [Panel Bank A] lower than 69 […] [Panel
Bank A] is still at 69 and the fix is at 68” to which Mr Farr replied, “Yeah, I’ll push
that today. I’ll see if I can … he’s a bit of an arse to talk to but I will … I’ll try and
sort if I can have a word with him. I’ll try.”
4.29.
On 28 January 2009, Trader A entered into Wash Trade number 4 arranged by Mr
Farr. The counterparty to this Wash Trade was RBS (through Trader B).
4.30.
Martins received £27,264.78 in brokerage for Wash Trade number 4 – £19,474.84
from UBS and £7,789.94 from RBS.
Wash Trade number 5 – 25 February 2009
4.31.
On 25 February 2009, Mr Farr and Trader A had the following Bloomberg
FARR:
anything cookjing i can try desperate for a decent trade gone
pear shaped this month
TRADER A:
we can switch 2yrs…today
TRADER A:
in mean time … low 1m and 3m … we must keep 3m down …
and high 6m … act 6m unchanged today … try for low on all
of em … from tomorrow need 6m high as a drug addict
FARR:
ok ill do my best for those tday
TRADER A:
we can do 150b 2yrs bro both sides…ask [Trader B] … will
that help?
FARR:
ok mate that will make us make3 budget for the month so
massive yes
4.32.
During a subsequent telephone conversation on the same day, Trader A told Mr
Farr that they could arrange the Wash Trade through a colleague of his, Trader D
of UBS. Mr Farr showed his gratitude by stating “I owe you one, mate. I’ll make
it up to you when I come over” meaning that he would provide Trader A with
hospitality. In response, Trader A told Mr Farr that he didn’t expect to be
entertained in return for the Wash Trades and Mr Farr replied “Yeah, I know, you
need the LIBOR stuff. I know that’s really important. I know how important it is…”.
4.33.
On 25 February 2009, Trader A entered into Wash Trade number 5 arranged by
Mr Farr. The counterparty to this Wash Trade was RBS (through Trader B).
4.34.
Martins received £52,928.46 in brokerage for Wash Trade number 5 – £29,404.70
from UBS and £23,523.76 from RBS.
4.35.
On 2 March 2009, Mr Farr and Trader A had the following telephone conversation
in which Mr Farr thanked Trader A profusely for executing Wash Trade number 5:
FARR:
Mate you don’t even realise how much that helped out;
massively helped out. It went from being a loss month to
actually making budget and now at least we’re going to be
hopefully batting for ourselves now this month so mate it was
massive, massive favour. I do appreciate it.
TRADER A:
Well anything I can do to help you guys out towards month,
it’s just like I’m happy to do it towards month end because it
sort of suits me as well if I’ve had a good month I don’t mind
doing it.
FARR:
Yeah mate it’s massive, massive, you don’t realise how big
that is for us.
TRADER A:
Yeah all right well that’s fine I don’t mind doing it just try and
like help me out on my stuff yeah?
FARR:
Yeah of course mate that’s a fucking priority don’t worry all
right.
4.36.
Trader A’s reference to helping out on “my stuff” was a reminder that, in return
for the Wash Trades, Trader A expected Mr Farr to assist him in attempting to
influence the LIBOR submissions of Panel Banks.
Mr Farr’s awareness of the improper nature of the Wash Trades
4.37.
Mr Farr was a broker with considerable experience as well as being a Manager on
the JPY Desk and he knew that the Wash Trades were improper trades which were
intended to generate brokerage for no legitimate commercial purpose. Despite
this, he arranged the nine Wash Trades.
4.38.
In particular, Mr Farr knew that the Wash Trades, and his role in arranging them,
were improper, as evidenced by the following:
(1)
Mr Farr himself characterised two proposed Wash Trades as being “a bit
dodgy” on two separate occasions in conversations with Traders and as
being a “bro paying exercise basically”. Furthermore, Trader E of Bank B
and Trader F of Bank C both agreed with Mr Farr’s observation that the
proposed trades would be “a bit dodgy” when declining to enter into the
Wash Trades.
(2)
Mr Farr was aware that the four Traders who participated in the Wash Trades
(Traders A, B, C and D) had concerns about how the Wash Trades were
recorded and, in some cases, he assisted them in attempting to conceal the
Wash Trades from their employers. For example, in the context of arranging
a Wash Trade, Trader A telephoned Mr Farr and expressed his anxiety in
relation to the visibility of the Wash Trade at UBS explaining: “What I’m
doing, mate, don’t fucking put it on chat […] don’t put it on fucking chat, all
right […] Send the SwapsWires2, send one now and then send one in about
40 minutes […] I’m not really meant to do it, am I?”. Mr Farr replied “No,
no, sure. Sure. Sure. Sure.”
(3)
Mr Farr asked Traders at other client banks to participate in Wash Trades
but they refused because they evidently regarded them as improper. For
example, on 28 January 2009, Mr Farr telephoned Trader F of Bank C and
asked “Is there any way you might be able to do something for me in a
switch in 2-year semi3 flat, no bro, with UBS? In and out, same rate, same
amount.” Trader F replied “UBS both sides?” and then immediately
confirmed “Oh, mate, no interest.”
2 This is a reference to the trade confirmation system known as SwapsWire.
3 ‘Semi’ denotes semi-annual, meaning that the frequency of payments of the fixed/floating rate is twice a year.
(4)
Mr Farr himself demonstrated that he was conscious of the inappropriate
nature of the Wash Trades and therefore the need for secrecy. For example,
when Mr Farr telephoned Trader C of Bank A to request his participation in
a Wash Trade, he made it clear that he could not discuss the matter within
the earshot of other Traders, saying “Hello, mate. Ah, can I … can I speak
to you on the line, mate? It’s a bit … can’t really say it on the box”4. When
Trader C of Bank A declined to participate in the Wash Trade, Mr Farr
immediately telephoned Trader F of Bank C, once again, saying “Are you on
the line? I can’t really say it on the box.” When Trader F of Bank C also
refused to participate in the Wash Trade Mr Farr requested that he “keep
that one schtum anyway obviously”.
5.
FAILINGS
Lack of fitness and propriety
5.1.
The statutory and regulatory provisions relevant to this Notice are referred to in
Annex 3 to this Notice.
5.2.
In light of the facts and matters described above, the Authority considers that Mr
Farr’s conduct was dishonest and lacked integrity. Accordingly, he is not a fit and
proper person to perform any function in relation to any regulated activity carried
on by an authorised person, exempt person or exempt professional firm.
5.3.
The Authority considers that arranging Wash Trades to obtain unwarranted
brokerage for no legitimate commercial purpose is inherently dishonest and,
furthermore, Mr Farr’s conduct in relation to the Wash Trades was dishonest and
lacking in integrity because:
(1)
As a Broker, Mr Farr was expected to act in the financial interests of his
client, UBS. However, in arranging the Wash Trades, Mr Farr repeatedly
sought to make a financial gain for Martins and a personal financial gain for
himself at the expense of UBS.
(2)
Mr Farr repeatedly misled UBS by arranging improper trades designed to
generate unwarranted brokerage payments to Martins. He routinely lied to
4 ‘Box’ refers to the “squawk box” which is an intercom speaker that Brokers and Traders used to speak with and
pass information to each other. Where a Broker spoke with a Trader via the squawk box, what he said would be
projected through the Trader’s intercom speaker and would therefore be audible to anyone in the vicinity. Where
a Broker wanted to speak with a Trader privately, he would speak to him ‘on the line’, i.e. on a telephone line.
Trader A and encouraged him to believe that he was willing to attempt to
influence the JPY LIBOR submissions of Panel Banks as a means of bringing
about Wash Trades, in order to obtain unwarranted brokerage payments
from UBS.
(3)
On one occasion, Mr Farr procured (via an expenses claim) that Martins paid
for hotel accommodation for Trader A; once again, this was as a means of
bringing about a Wash Trade, in order to obtain unwarranted brokerage
payments from UBS.
(4)
Mr Farr was aware that the Wash Trades were improper. He was aware that
all of the Traders who agreed to participate had concerns about how the
Wash Trades were recorded, and assisted them in concealing them from
their employers. Moreover, four Traders refused Mr Farr’s requests to
participate in the Wash Trades and Mr Farr knew that this was because they
regarded such trades as improper. In addition, Mr Farr himself demonstrated
that he was conscious of the inappropriate nature of the Wash Trades and
therefore the need for secrecy, and he proactively sought to conceal the
Wash Trades in his dealings with Traders. He himself contemporaneously
characterised the Wash Trades as being “a bit dodgy” on two separate
occasions. Trader E of Bank B and Trader F of Bank C both endorsed Mr
Farr’s observation that the proposed trades would be “a bit dodgy” when
refusing to participate.
6.
SANCTION
Prohibition order
6.1.
The Authority considers Mr Farr’s misconduct to be serious, and that it was
dishonest and lacked integrity. As a result of his lack of honesty and integrity, the
Authority considers that Mr Farr is not fit and proper to perform functions in
relation to regulated activities. The Authority therefore considers that it is
appropriate and proportionate in all the circumstances to make an order
prohibiting Mr Farr from performing any function in relation to any regulated
activity carried on by an authorised person, exempt person or exempt professional
firm. This action will advance the Authority’s consumer protection and integrity
operational objectives.
6.2.
In making the prohibition order, the Authority has had regard to the guidance in
Chapter 9 of EG (the relevant provisions of which are set out in Annex 3 to this
Notice).
7.
REPRESENTATIONS
7.1.
Annex 4 contains a brief summary of the key representations made by Mr Farr,
and how they have been dealt with. In making the decision which gave rise to
the obligation to give this Notice, the Authority has taken into account all of the
representations made by Mr Farr, whether or not set out in Annex 4.
8.
PROCEDURAL MATTERS
This Notice is given under and in accordance with section 390 of the Act.
8.1.
The following statutory rights are important.
Decision-maker
8.2.
The decision which gave rise to the obligation to give this Notice was made by the
Regulatory Decisions Committee.
8.3.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this Notice relates. Under those provisions,
the Authority must publish such information about the matter to which this Notice
relates as the Authority considers appropriate. The information may be published
in such a manner as the Authority considers appropriate. However, the Authority
may not publish information if such publication would, in the opinion of the
Authority, be unfair to Mr Farr or prejudicial to the interests of consumers or
detrimental to the stability of the UK financial system.
8.4.
The Authority intends to publish such information about the matter to which this
Final Notice relates as it considers appropriate.
Authority contact
8.5.
For more information concerning this matter generally, contact Inma Castro at
the Authority (direct line: 020 7066 1122; email: inma.castro@fca.org.uk).
Sadaf Hussain
Head of Department
Enforcement and Market Oversight Division
Financial Conduct Authority
ANNEX 1
THE NINE WASH TRADES ARRANGED BY MARTINS
1
19 September 2008
UBS
£12,805.25
RBS
£10,244.20
UBS
£12,805.25
RBS
£0.00
TOTAL
£25,610.50
£10,244.20
2
19 September 2008
UBS
£3,201.31
Bank A
£0.00
UBS
£3,201.31
Bank A
£0.00
TOTAL
£6,402.62
£0.00
3
03 December 2008
UBS
£12,915.74
RBS
£0.00
UBS
£12,915.74
RBS
£0.00
TOTAL
£25,831.48
£0.00
4
28 January 2009
UBS
£9,737.42
RBS
£0.00
UBS
£9,737.42
RBS
£7,789.94
TOTAL
£19,474.84
£7,789.94
5
25 February 2009
UBS
£14,702.35
RBS
£11,761.88
UBS
£14,702.35
RBS
£11,761.88
TOTAL
£29,404.70
£23,523.76
6
26 March 2009
UBS
£7,200.53
RBS
£5,682.12
UBS
£7,102.64
RBS
£5,760.43
TOTAL
£14,303.17
£11,442.55
7
12 May 2009
UBS
£7,831.06
RBS
£6,264.85
UBS
£7,831.06
RBS
£6,264.85
TOTAL
£15,662.12
£12,529.70
8
26 June 2009
UBS
£8,027.73
RBS
£6,422.19
UBS
£8,027.73
RBS
£6,422.19
TOTAL
£16,055.46
£12,844.38
9
25 August 2009
UBS
£9,654.17
RBS
£7,723.33
UBS
£9,654.17
RBS
£0.00
TOTAL
£19,308.34
£7,723.33
GRAND TOTAL
£258,151.09
Brokerage paid by
UBS
£172,053.23
Brokerage paid by
RBS
£86,097.86
Brokerage paid by
Bank A
£0.00
ANNEX 2
EXAMPLE: ORDINARY TRADE (SWAP)
Buys 2 yards of 5 year swap @ 0.0200
Sells 2 yards of 5 year swap @ 0.0200
Broker
Organises one trade between
Bank A and Bank B.
Receives brokerage from both
banks on one trade.
Bank A (after trade):
Position: Long 2 yards of 5 year swap
Profit and Loss: Unrealised
Counterparty credit risk: Yes
Bank B (after trade):
Position: Short 2 yards of 5 year swap
Profit and Loss: Unrealised
Counterparty credit risk: Yes
Bank A wants to pay fixed (buy) on notional JPY 2,000,000,000
(2 yards) for 5 years at an interest rate of 0.0200
Bank B wants to receive fixed (sell) on notional JPY 2,000,000,000
(2 yards) for 5 years at an interest rate of 0.0200
Trade
Broker (after trade):
Receives brokerage on one trade
from Bank A and Bank B
EXAMPLE: WASH TRADE (SWAP)
Buys 2 yards of 5 year swap @ 0.0200
Sells 2 yards of 5 year swap @ 0.0200
Broker
Organises two trades between
Bank A and Bank B.
Receives brokerage from both
banks on two trades.
Bank A (after trade):
Position: Flat
Profit and Loss: 0
Counterparty credit risk: No
Bank B (after trade):
Position: Flat
Profit and Loss: 0
Counterparty credit risk: No
Trade 1
Trade 2
Brokerage
Trade 2
Broker (after trade):
Receives brokerage on two trades
Brokerage
Trade 2
Sells 2 yards of 5 year swap @ 0.0200
Buys 2 yards of 5 year swap @ 0.0200
A Wash Trade in relation to an IRS, as relevant to this Notice, occurs where two counterparties transact with each other for the same nominal amount at the
same fixed rate, for the same tenor, on the same day, creating two identical but opposite transactions with no risk or commercial value, because the second
transaction would eliminate the risk positions assumed by both parties in the first transaction. The parties therefore end up in a neutral position as if neither
transaction had ever occurred. Both transactions would be arranged by an interdealer broker who can be paid brokerage fees on one or both transactions
by either one or both banks. So, although the counterparties are in a neutral position (other than any brokerage paid), the interdealer broker has received
a brokerage payment that has no legitimate commercial purpose.
ANNEX 3
RELEVANT STATUTORY AND REGULATORY PROVISIONS
1.
The Authority’s statutory objectives, set out in section 1B of the Act, include the
consumer protection and integrity operational objectives.
2.
Section 56 of the Act provides that the Authority may make an order prohibiting an
individual from performing a specified function, any function falling within a
specified description or any function, if it appears to the Authority that that
individual is not a fit and proper person to perform functions in relation to a
regulated activity carried on by an authorised person, exempt person or a person
to whom, as a result of Part 20 of the Act, the general prohibition does not apply
in relation to that activity. Such an order may relate to a specified regulated
activity, any regulated activity falling within a specified description, or all regulated
activities.
The Fit and Proper test for Employees and Senior Personnel
3.
The Authority has issued guidance on the fitness and propriety of individuals in FIT.
4.
FIT 1.3.1G states that the Authority will have regard to a number of factors when
assessing the fitness and propriety of a person. FIT 1.3.1B states that, in the
Authority’s view, the most important considerations will be the person’s honesty,
integrity and reputation, competence and capability and financial soundness.
5.
FIT 2.1.1G and 2.1.3G set out that in determining a person’s honesty, integrity and
reputation, the Authority will have regard to all relevant matters including whether
the person has contravened any of the requirements and standards of the
regulatory system or equivalent standards or requirements of other regulatory
authorities (including a previous regulator).
The Authority’s policy for exercising its power to make a prohibition order
6.
The Authority’s policy in relation to prohibition orders is set out in Chapter 9 of EG.
7.
EG 9.1.1 states that the Authority may exercise this power where it considers that,
to achieve any of its statutory objectives, it is appropriate either to prevent an
individual from performing any function in relation to regulated activities or to
restrict the functions which he may perform.
8.
EG 9.5.1 sets out that where the Authority is considering whether to make a
prohibition order against someone who is not an approved person, the Authority
will consider the severity of the risk posed by the individual and may prohibit him
where it considers this is appropriate to achieve the Authority’s statutory
objectives.
9.
EG 9.5.2 provides that, when considering whether to exercise its power to make a
prohibition order against such an individual, the Authority will consider all the
relevant circumstances of the case. These may include, but are not limited to, the
factors set out in EG 9.3.2. Those factors include: whether the individual is fit and
proper to perform functions in relation to regulated activities (noting that criteria
are set out in FIT 2.1, 2.2 and 2.3); the relevance and materiality of any matters
indicating unfitness; the length of time since the occurrence of any matters
indicating unfitness; and the severity of the risk which the individual poses to
consumers and to confidence in the financial system.
REPRESENTATIONS
1.
Mr Farr’s representations (in italics), and the Authority’s conclusions in respect of
them, are set out below.
Mr Farr’s acquittal in criminal proceedings
2.
Mr Farr stood trial on two counts of conspiracy to defraud in relation to the Yen
LIBOR rate, and was found not guilty on both counts. The accusations in those
proceedings, which he strongly denied, encompassed the trades in question in
these proceedings. It is highly unfair now to take action in respect of those trades.
3.
In the criminal proceedings, it was an agreed fact between both parties that Wash
Trades do not constitute the criminal or regulatory offence of market abuse under
the Act.
4.
The Authority appears to be trying to punish him in another way because he was
acquitted. Had he been found guilty, it seems unlikely that the Authority would still
have investigated him in respect of the trades in question. It is notable that the
Authority is not pursuing Mr Farr in relation to alleged LIBOR manipulation, which
suggests they are of the view that the rule against “double jeopardy” does not
permit this.
5.
These proceedings do not infringe the “double jeopardy” rule. The criminal offence
with which Mr Farr was charged did not include his arrangement of the Wash
Trades, albeit they were referred to in the proceedings: the prosecution contended
that the Wash Trades were one of the ways in which Trader A rewarded Mr Farr for
his part in the alleged conspiracy.
6.
It is correct that the Wash Trades did not constitute “market abuse” under the Act.
However, that is irrelevant to these proceedings, since the allegation that Mr Farr
lacks fitness and propriety does not involve any allegation of market abuse.
7.
Had Mr Farr been convicted of LIBOR manipulation, it is likely that the Authority
would have pursued a prohibition against him based on the conviction which, in
itself, would have been likely to have provided a clear basis for concluding that Mr
Farr was not fit and proper. In the light of his acquittal, the Wash Trades, without
more, provide a clear basis for prohibition (for the reasons set out in this Notice)
so the Authority has not revisited the allegations which were the subject of the
criminal charges of which Mr Farr was found not guilty.
The trades were not dishonest
8.
The trades in question executed by Mr Farr were not dishonest. He denied they
were dishonest at the time of his criminal trial and still does.
9.
He thought it was fine to do these trades at Martins. The trades were executed in
front of his colleagues and with the knowledge of his superiors, including the head
of his desk. They were booked through Martins’ normal dealing system and the
figures would have been seen and checked by the back office, and probably by the
desk head, who would have had an interest in reviewing the business done by the
desk each day; they could also be seen by any senior member of staff.
10.
The trades generated revenue for Martins, which was what Mr Farr, as a broker,
was there to do. When describing the trades in question as “dodgy”, Mr Farr did
not mean that he regarded it as wrong for him to arrange them; he was using the
term loosely to describe the fact that the Traders to whom he was speaking might
have internal rules which meant that they, at their banks, could not enter into
them. When asking another Trader to “keep that one schtum” in relation to the
possibility of such a trade, he was motivated only by a wish to ensure that others,
who might have been listening in on the box, did not know that he had secured a
favourable deal.
11.
Mr Farr was assured by Trader A at some point by telephone that Trader A had
obtained authority from his own boss to enter into the trades in question.
12.
The trades in question were legitimate payment for services provided by Martins to
Trader A on an ongoing basis. Trader A did relatively little business with Martins,
and the trades were a “top-up” of commissions in return for Mr Farr having to deal
with a non-stop barrage of questions all day from Trader A.
13.
Also, Mr Farr worked for a brokerage house, not a bank. As such, he learned about
the broking role on the job, and did not receive the training on what was, or was
not, acceptable which he would have received if he had worked for a bank. With
his knowledge now about what is and is not acceptable, Mr Farr would not enter
into trades of the kind in question again, but at the time he did not overstep the
guidelines he had then.
14.
It is inherently and self-evidently improper to arrange a Wash Trade in the manner
set out in this Notice. It is a means of obtaining brokerage payments from banks
without providing anything legitimate in return.
15.
There is evidence that Mr Farr knew that the trades were improper when he
arranged them: see paragraphs 4.37 and 4.38 of this Notice. In relation to his
representations about certain parts of that evidence, the Authority does not accept
Mr Farr’s explanation about his use of the word “dodgy”, which in its view has a
natural meaning of being generally wrong and was not qualified by him in any way
as being only applicable to the Traders in question. Likewise, his explanation of
the request to “keep that one schtum” lacks credibility given that when he made
that request he had previously checked that nobody was listening in to the
conversations in question. Indeed, had anyone been listening in, the request would
have alerted them to the fact that something significant had been said.
16.
The Authority does not accept that the Wash Trades were legitimate payment for
services rendered. This is implausible in the light of the matters referred to in the
preceding paragraph, and at paragraph 4.38 of this Notice. Further, the Authority
notes that there would have been other, transparent, ways of achieving the same
objectives (such as increasing brokerage rates for business which had a commercial
purpose).
17.
The Authority notes that the comment by Trader A set out at paragraph 4.38(2) of
this Notice (“What I’m doing, mate, don’t fucking put it on chat […] don’t put it on
fucking chat, all right […] Send the SwapsWires, send one now and then send one
in about 40 minutes […] I’m not really meant to do it, am I?”) is inconsistent with
Trader A’s having obtained authorisation to enter into Wash Trades, at least as at
the date of that conversation (3 December 2008). Even if Trader A had secured
his own boss’s approval to the Wash Trades, this would not excuse Mr Farr’s doing
something he knew to be wrong; for the reasons set out above, the Authority
considers this was clear to Mr Farr. Also, Mr Farr knew that Trader A was entering
into the Wash Trades on the basis that he believed Mr Farr was influencing banks’
LIBOR submissions; on Mr Farr’s own account, he knew this was false because
either he did not bother to speak to the banks or, when he did, it was without any
expectation that they would make any changes to their submissions.
18.
Mr Farr also knew that Trader B’s willingness to enter into the trades on behalf of
RBS was driven by Martins’ payment of entertainment expenses. For example, in
relation to Wash Trade number 5, Trader A advised Mr Farr to “make sure you lush
[Trader B] up a bit then” and Mr Farr responded, “Yeah I’ll leave that down to
[Broker B] mate”. Further, as Mr Farr knew, Trader A was influenced to enter into
Wash Trade number 7 by Mr Farr having arranged for Martins to pay a substantial
hotel bill on his behalf.
19.
The Authority considers that Mr Farr arranged trades which he knew to be improper,
and this was clearly dishonest.
20.
Even if it were true that others at Martins knew or suspected that improper trades
were being carried out but chose not to object, that would not excuse Mr Farr. He
is responsible for his own actions, even if his colleagues condoned them or chose
to look the other way.
21.
Likewise, a lack of compliance training or standards within Martins provides Mr Farr
with no excuse for having done what he knew to be wrong. It is not necessary to
have explicit guidelines forbidding the arranging of trades, the sole purpose of
which is to pay commission to the broker, in order to know that it is improper to do
so.
22.
In fact, however, the evidence shows that only Mr Farr and Broker B were engaged
in Wash Trades at Martins.
Mr Farr’s personal profit was relatively small
23.
Only a relatively small part of the £258,151.09 obtained by Martins as a result of
the trades in question was received by Mr Farr personally. As, where the team met
its budgeted profit figures, 30% of the total profits were shared among eight
individuals on the JPY Desk by way of bonus, his share of the total was only £9,000
or so.
24.
The Authority notes Mr Farr’s calculation, but considers that this does not excuse
dishonest conduct carried out for personal gain. Also, it is evident from what Mr
Farr said to Trader A in respect of the Wash Trades (see paragraphs 4.25, 4.31,
4.32 and 4.35 of this Notice) that he was very grateful for the commission they
generated and regarded it as highly significant in terms of its effect on the bonus
pool available for distribution to the Brokers on the JPY Desk.
Mr Farr has been singled out
25.
Mr Farr appears to have been singled out for action by the Authority; although
other individuals have also been investigated, some who benefitted from, or
condoned, the alleged misconduct are facing no further action.
26.
The Authority notes that, within Martins, only Mr Farr and Broker B were involved
in arranging the Wash Trades. Even if others had been involved, this would not be
a reason to decline to take action against Mr Farr; rather, it would have been a
reason to take action additionally against the others involved. Also, it is on the
public record that action has previously been taken against related parties,
including Martins and other members of its staff, for matters including the Wash
Trades.
The Authority has gone back on an assurance given
27.
In response to a question by Mr Farr’s representative on the occasion of his
compelled interview with the Authority, one of the investigators said that he did
not think the Authority would be needing to see Mr Farr again. This appears to have
changed.
28.
The investigator concerned is no longer with the Authority but the Authority has no
record of his having said this. If he did, the natural interpretation of the words is
that the Authority would not need to re-interview Mr Farr. This was indeed the
case. The words do not bear the natural meaning that no further action would be
taken against Mr Farr and do not provide any basis on which it can be said to be
unfair to take action against Mr Farr in the light of that conversation.
The passage of time and the effect on Mr Farr and his family
29.
Mr Farr has not worked in a dealing room since 2011. He was arrested in December
2012 and has been unable to seek employment in the financial (or any other) sector
since then, having been under investigation throughout that period. Specifically,
he has been unable to seek employment following the end of the criminal trial three
years ago because of the Authority’s investigation. He has been attempting to
forge a new career in grounds maintenance via a small company which he has set
up with another person, with some success. A decision to prohibit him on grounds
of dishonesty and lack of integrity would go against him in all sorts of ways and be
a black mark against his name due to the publicity that would be involved.
30.
He has been trying to recover from the stress and trauma of the investigations,
which is not easy. He and his family have suffered enough, including financially,
because his current work is not very lucrative.
31.
Misconduct involving dishonesty and a lack of integrity having been established as
set out in this Notice, the stress and disruption to Mr Farr’s (and his family’s) life
caused by the prior criminal proceedings are regrettable, but not a reason not to
make a prohibition order: the prosecution was not brought by the Authority, and,
as noted above, related to different allegations to those in these proceedings.
32.
The Authority notes the general representations made by Mr Farr about the long
time during which he has been under investigation. In considering those
representations, the Authority has had regard specifically to whether, given the
long time since the end of the Relevant Period, Mr Farr has suffered prejudice due
to the time taken by the Authority in investigating the Wash Trades, and in bringing
its proceedings. It has concluded that it was reasonable for the Authority to pause
its investigation into Mr Farr pending the conclusion of the criminal proceedings
against him. It does not consider that the period taken by the Authority to conclude
its investigation thereafter and bring these proceedings was unreasonable. Further,
the underlying facts of the Wash Trades themselves are relatively straightforward
and a matter of record; the Authority notes that Mr Farr has not alleged, for
example, that he is unable to recall any relevant facts due to the lapse of time, or
that any other evidence has been lost as a result. Taking these factors into account,
the Authority considers that the lapse of time since the Relevant Period has not
caused Mr Farr prejudice in terms of the fair resolution of these proceedings and
should not affect its decision on whether or not to impose a prohibition order.
33.
Likewise, while the Authority acknowledges the stress and disruption caused by the
Authority’s own investigation and proceedings, these do not provide a basis not to
issue a prohibition order.
34.
The fact that Mr Farr may suffer damage to his new career by reason of a public
finding of dishonesty (if the matters to which this Notice relates are published,
which they usually are) is not a reason not to make either such a finding, or a
prohibition order. If it were, this would be the case in almost all proceedings.
Moreover, the true cause of the damage would be not the proceedings themselves
but the underlying misconduct and the resulting risk posed by Mr Farr.
35.
There are no other circumstances in this case which would justify not issuing a
prohibition order as the dishonesty and lack of integrity is established.