Brief Calls for “Illogical” Government Argument to Be Overturned in Johnson Case

20 September 2018 – ACI – Financial Markets Association (ACI FMA) has filed an Amicus Brief on behalf of former HSBC FX trading head Mark Johnson, who is appealing his conviction and sentencing earlier this year for several wire fraud offences.

Extracts published with permission of Profit and Loss

In the Amicus ACI says that if the US government’s “illogical” position is allowed to stand, and the conviction is not overturned, bank dealers are unlikely to operate in the face of potential criminal sanctions simply for transparently and fairly hedging the uncompensated risk of “colossal loss” to their shareholders.

“They are far more likely to simply stop accepting significant principal risk transfer and offer to fill transactions like the Cairn order exclusively on an agency or “at best” basis,” it states. “Put simply, the less banks are incentivised to take the risk of accepting transfers of client exposure on a principal basis – or indeed the more they are penalised for doing so – the less they will support or originate liquidity. Risk tolerance and liquidity go hand in hand, and should this reticence become widespread, the implications to FX and related OTC markets is manifest. 

“If permitted to stand, the conviction not only represents an individual injustice, but will have a chilling market-wide impact upon FX liquidity providers, likely resulting in greater damage to market end users – the very class of person the US government presumably sought to protect in the instant prosecution,” it adds.

Pertinently, the Amicus highlights how conduct rules promulgated and endorsed by the Financial Stability Board (FSB) and global central banks (including the Federal Reserve Bank), that are embodied in the ACI Model Code and Global Code, provide far more than tacit acceptance of HSBC’s method of handling of the fix order.

These current versions embody closely similar language from prior codes in effect at the time of Johnson’s complained-of conduct and embody decades old banking custom and practice. “Under the facts and circumstances demonstrated in this case, such codes specifically approve pre-hedging and transacting before a fix in the execution of a fix order,” it states.  Click here for full article.

Earlier coverage


ACI FMA  is leading the way for industry associations with the filing of its Amicus Curiae brief* to former HSBC executive Mark Johnson’s appeal against conviction in the US relating to a $3.5 billion foreign exchange order.  More to follow.

As Colin Lambert of Profit & Loss observed in his “And Finally” column on 2 August, “[Trade] associations purport to speak for their members, well I would suggest the members – dealers of the present as well as of the recent past – need their voice represented loud and clear over this issue.….. [ACI] got in contact and decided to start an initiative – which is ongoing – to demonstrate just such leadership by developing a paper that explains the need for pre-hedging under certain circumstances”.

“Our major concern is that, at face value, this case revolves around pre-trade hedging a large fixing transaction and questions the legitimacy of a bank following the correct risk management approach to such a deal.  If the appeal is not successful this could have huge implications in the use of ISDA agreements and the concept of principal-to-principal trading that underpins FX trading, and we will have to think about the implications for the market.” Bruno Langfritz, Chair, ACI FMA – FX Week

Extract from FX Week 1 August 2018 (reproduced with permission)

Johnson, a former global head of foreign exchange cash trading at HSBC, was found guilty of wire fraud and conspiracy in October 2017, for “front running” a large fixing trade that he and his team conducted in December 2011 for the bank’s client, Cairn Energy. He was sentenced to two years in prison in April and is appealing the conviction in the Second Circuit Court.

ACIFMA believes the facts that are on appeal are particularly concerning because the decision made by jurors in the Eastern District Court of New York appears to have altered or overridden the scope of the fiduciary obligations under the ISDA agreement – a standard master contract that underpins several over-the-counter transactions.

There is also unease among ACIFMA members that Johnson has been labelled a criminal for trading in a manner that seems to conform to what the FX Global Code of Conduct has approved as being good industry practice.

While the Code did not exist when Johnson was trading in the market, Principle 11, which outlines best practices around pre-hedging orders, and Principle 10, which is relevant to fixing orders, were the product of two years of work between public- and private-sector representatives.  According to these principles, Johnson acted in line with best practices as they stand today.

Q&A with Bruno Langfritz and Profit and Loss – 2nd August 2018 (reproduced with permission)

P&L: Why is ACIFMA speaking out now? 

BL: We have been monitoring this case in our Working Groups and noted the call by the defence team with regard to an Amicus Brief. Accordingly we have asked to see some further evidential materials and are looking to draft a response. This response will be sent out in my name.

P&L: What is it about the case that concerns the ACI and what does the verdict mean for its members? 

BL: My major concern is that at face value this case revolves around pre-trade hedging a large fixing transaction and questions the legitimacy of a bank following the correct risk management approach to such a deal. Also the deal was between a British bank and a British customer and predominantly executed in London with the customer advised by a second British bank. That this can lead to a territorial reach leading to a criminal trial in the New York district courts rather than the British courts is a worrying development for the market with potentially far reaching consequences for the US markets.

P&L: What impact do you think the decision can have growing forward? 

BL: Potentially the impact will be quite significant if customers want to continue to use the Fix for hedging their transactions. If banks feel, because of the legal verdict, they could not pre-trade hedge these orders, the market impact could be significant. The cost of fixing transactions would rise and potentially we could see unhelpful extreme exchange rate movements during the fixing window. This would not be conducive regarding consideration as to if your actions risk disrupting the market. It also raises profound issues for the concept of principal-to-principal trading.

P&L: How will this verdict impact the FX Global Code of Conduct, if at all, especially if upheld at appeal?

BL: If the verdict is upheld at the appeal the GFXC would need to reconsider the advice and examples given in the FX Global Code concerning pre-trade hedging. Given the Code covers all market participants, those who use the Fix to hedge transactions will have to think carefully as to if that is appropriate mechanism, especially for larger amounts, going forward.

Consideration will have to be given as to if transacting FX orders within the reach of US jurisdiction is appropriate given the potentially different legal interpretation compared to other jurisdictions. If the appeal is not successful this could have huge implications in the use of ISDA agreements and the concept of principal to principal trading that underpins FX trading and we will have to think about the implications for the market.

Download Q&A pdf here

*Amicus briefs are legal documents filed by non-litigant parties who have a strong interest in the subject matter of cases going through appeal, to advise the courts on additional relevant information that might be relevant to the case. Opening briefs in the case are due on August 30. Amicus filings must be made within seven days of that date.