December 9, 2012 7:38 pm
Compound interest: the global rate-rigging probe
Sticky moment: with regulators closing in on another settlement over Libor, people familiar with the negotiations say UBS’s role has attracted renewed scrutiny

Opfikon, a Swiss suburb with leafy streets, neat homes and a cluster of concrete office blocks, became an unlikely faultline in the Libor scandal this spring. Just outside Zürich, it is a place where thousands of soberly clad finance professionals put in intense nine-hour days. But this spring, staff at UBS’s offices there started to notice something unusual.

Every few days or so, a trader at the Swiss bank did not show up for work. At first, other staffers were puzzled by their colleagues’ empty desks on the trading floor.

Soon enough, news got around. The missing men had been suspendedall because of questions about possible manipulation of a global benchmark interest rate known as the London Interbank Offered Rate, or Libor.

“It was pretty indiscriminate. They [the bank] let go of almost anyone who was even vaguely involved” in discussions about Libor, said one person who worked on the floor. “Even people who had simply been copied in on emails.” The moves were seen as “highly precautionary”, he said, because UBS wanted to appear to be acting decisively on Libor.

By summer, the reason for the swift, silent upheaval became apparent.

As the UBS staff thinned out, Barclays became the first of nearly 20 financial institutions under scrutiny to cut a deal with US and UK regulators to end questions about possible rate-fixing for financial gain.

Barclays paid $450m in fines to stave off possible criminal charges by the US Department of Justice and satisfy demands from the Commodity Futures Trading Commission in Washington and the Financial Services Authority in London. Bob Diamond, Barclays’ chief executive, resigned in an ensuing political firestorm. As he left, he condemned the “reprehensiblebehaviour of some traders, whom he blamed for trying to manipulate Libor and Euribor, its European equivalent.

Now, banks are steeling themselves for fresh recriminations over Libor as regulators close in on another settlement. Royal Bank of Scotland has been widely tipped to be the next to make a deal. But people familiar with the negotiations told the Financial Times that UBS entered regulatory talks in the past two weeks in hopes of settling as early as this week.

UBS was the first bank to sign co-operation deals with antitrust authorities in the US and Canada in an effort to lessen any penalties. However, after regulators began sharing information, UBS’s role attracted renewed scrutiny, people familiar with the case said. Those people say the Swiss bank could face a penalty higher than Barclays’ $450m.

Questions about rate-rigging began four years ago when the CFTC assigned two staff investigators to look into allegations about suspicious movement in the interest rate.

The US effort has expanded into a probe spanning three continents by at least 10 regulators and prosecutors in the UK, Canada, Switzerland, Brussels, Japan and Germany. While known as “the Libor probe”, it spans other rates including Euribor and Tibor, the Tokyo equivalent.

Allegations that banks rigged Libor, which underpins the terms of $350tn of borrowing contracts worldwide, have prompted litigation from investors and homeowners alleging financial loss from manipulation. Resolving these cases could take years. In the meantime, banks worry that the steady drip of news about the Libor inquiries can only further damage reputations that remain tarnished from the financial crisis.

But the settlements, wrung out bank by bank by regulators, may well contain valuable lessons. Each has the potential to add details to understanding the pulse and impulses of global finance in the last decade – and how individual traders from Tokyo to New York to London, with perhaps different ambitions and intent, could have influenced and contributed to large-scale rate manipulation.

. . .

A year ago, many people outside the world of trading markets had never heard of Libor.

Benchmark rates – of which Libor is the best known – are intended to be daily measures of how much banks are paying to borrow from one another in multiple currencies for set lengths of time.

These are set each day after the world’s leading banks submit their own estimates of borrowing rates. The highest and lowest are discarded, and an average taken from the rest.

In February, the banking world was jolted by the revelation that more than a dozen traders and brokers in London and Asia had been fired, suspended or put on leave as part of an expanded inquiry into possible Libor manipulation. UBS and Citigroup have been disciplined in Japan. The likes of HSBC and Deutsche Bank have been mentioned in court documents related to the Libor inquiry.

Yet as 2012 ends, the precise role of individuals disciplined or scrutinised remains unclear. Emails and phone calls are still being examined by regulators; banks have announced little except to reportco-operation” with authorities in quarterly filings.

The FT has contacted traders whose names have entered the public domain to piece together a fragmented scenario of what went wrong with Libor. Some individuals, reached in locations throughout the world, have declined to comment for the record or denied wrongdoing. Others have been impossible to trace.

Adding to the complexity is the fact that investigations into rate manipulation focus on two distinct types of abuse. First was the practice by banks of lowballingsubmitting artificially low rates – their daily rate submissions to paint a rosier picture of their financial health and mask difficulties at the height of the financial crisis. Then there are the alleged abuses by tradersrequesting that submissions be either high or low – with the objective of personal gain.

Interviews with bankers, settlement documents and court filings indicate that some traders were influential enough – and connected enough – to reach out to contacts across the sector and ask for favours.

Capitalising on relationships formed as they moved from bank to bank in the course of their careers, they had personal access to a wider network of colleagues and could tap into their knowhow to organise rate-rigging between institutions.

According to the FSA’s 44-page settlement notice to Barclays, there were multiple instances of traders at other banks asking their Barclays counterparts to change the submissions that were used to compile the benchmark rate.

For example, in September 2006 one trader sent an instant message to “Trader E” at Barclays asking for a low one-month submission. “I seriously need your help tomorrow on the 1mth fix,” the person wrote. The request was accepted and passed on to Barclays’ submitters with the trader blind-copied in a subsequent email.

An FT investigation confirmed that Philippe Moryoussef was Trader E and revealed that regulators suspected the former euroswaps trader at Barclays of having co-ordinated manipulation of Euribor.

According to several people familiar with the matter, Mr Moryoussef, who worked for Barclays from 2005 until 2007, was also the unnamed trader described by the CFTC in its settlement with Barclays as having orchestrated an effort to align trading strategies among traders at multiple banks […] in order to profit from their futures trading positions”.

Evidence of links between Mr Moryoussef and traders at Crédit Agricole, HSBC, Deutsche Bank and Société Générale are under scrutiny, people involved in the process have told the FT. Mr Moryoussef, reached through his lawyer, declined to comment and is not known to have been interviewed by any authority.

Now-infamous email exchanges made public by the FSA also establish a picture of a clubby world where tips on rate-setting and manipulation could be rewarded with bottles of champagne.

Any settlement involving UBS could also shine a light on another potential network of traders. The Canadian Competition Bureau has alleged that a small group of traders attempted to rig the yen Libor rate.

And while UBS is not identified in those filings, those with knowledge of the case say it is the institution that provided information about the alleged attempted manipulation, which involved employees at banks including HSBC, Deutsche Bank, RBS, JPMorgan Chase and Citi. UBS and other banks named in the case declined to comment.

Yet such a scenario could prove virtually impossible to map completely. One senior regulator recently alluded to the difficulty of this intra-bank aspect of the investigation, stating simply that the practice of rate manipulation was “pervasive”. As one former trader remarked of the daily process, “[It] is very difficult to know [who] is talking to whom, or using another desk.”

Allegations made by a former derivatives trader at RBS in Singapore have raised a contentious new element: that employees were not aware of wrongdoing when liaising with their bank’s rate-setters.
Tan Chi Minalso known as “Jimmy Tan – was fired by RBS a year ago for alleged gross misconduct relating to the setting of Libor, but he avers in a lawsuit for wrongful dismissal that it was part of his duties to provide rate-setters for Libor with “input” and that the bank was aware of his behaviour and condoned it.

RBS has declined to comment on the case specifically. However, it has said it is co-operating fully with regulators and is also conducting its own investigation into the setting of Libor. RBS has also successfully requested that the court seal all documents in the case to prevent public access.

The alleged behaviour could provide a window on the cut-throat world of trading, at a time when banks were rapidly expanding their businesses on a global scale.

The FSA found that at Barclays there were at least 173 trader requests to influence US dollar Libor submissions between January 2005 and May 2009, a period which coincided with the bank beefing up its swaps desk in New York and its presence in US derivatives.

Because attempted manipulation appears to have been widespread, regulators have tried to act fast in reforming the way rates are determined and set. Strides in governing and clarifying the rate-setting process have already been made through the UK government’s endorsement of an independent review of the benchmark, whose recommendations include making the submission of false information a criminal offence.

But in contrast to the rapid pace at which reform is taking place, unravelling the full web of manipulation is expected to take years. It is a bureaucratic detective story, involving millions of pages of email and telephone call transcripts, numerous transatlantic flights and intensive labour. Six months on from the Barclays settlement, the FSA is still dedicating about 10 per cent of its full-time enforcement staff to interest rate-related probes.

Probes of traders are also believed to take a long time because of the political sensitivities surrounding scrutiny of individuals by authorities of different nationalities.

This is believed to have been a concern by the UK authorities, keen to avoid a replay of the “NatWest Three affair, in which a trio of British bankers were controversially extradited to the US in 2006 to stand trial and serve jail sentences for fraud.

Caught up in the fallout of the Enron scandal, the men became something of a cause célèbre during their court battle to avoid transfer on charges brought by the US Department of Justice.

Still, traders should take no comfort in the delay. Banks, haunted by the behaviour of clusters of individuals stretching back years, “would be expected” to initiate waves of more employee suspensions around such settlements, said one person familiar with negotiations.

RBS recently suspended Jezri Mohideen, its head of rates trading in Europe and Asia-Pacific, the bank’s most senior employee to be put on leave as part of an internal Libor probe. Mr Mohideen declined to comment.

In the past two weeks, Deutsche said it has made provisions for a possible Libor penalty. And UBS, Switzerland’s largest bank by assets, has this year added SFr565m ($610m) to its provisions for dealing with litigation and regulatory matters.

. . .

Today, the Libor scandal is casting a longer shadow than ever. Last month UK regulators said they were concerned at the pressure on capital caused by legal settlement costs, in turn a concern for investors.

And Mark Carney, governor of the Bank of Canada and recently named as the next head of the Bank of England, has been outspoken about the need to restore credibility in how interest rates are set. He has characterised the facts yielded so far from the investigations as “deeply troubling”.

Public authorities have to play the lead in determining what next with Libor and if not Libor, what else and how to manage that transition, because there has to be absolute confidence in this,” Mr Carney said this summer. “If Libor cannot be fixed, if it is structurally flawed and cannot be fixedwhich is a possibility – there may need to be different types of approaches and we need to think that through.”

Progress of the global probes

US: the Commodity Futures Trading Commission led efforts to look into possible rate manipulation. The combined $450m Barclays settlement agreed between US and UK regulators was a record. The justice department is leading criminal investigations in the US, with its antitrust and fraud divisions involved.

UK: the Financial Services Authority is carrying out a regulatory investigation and co-ordinating international regulators. So far, together with its US counterparts, it has fined only Barclays. It has also been leading work on improving the Libor-setting process. The Serious Fraud Office has opened a criminal investigation into traders at Barclays and other banks.

Canada: competition authorities have launched an inquiry into alleged collusion between domestic and international banks to determine whether Canadian citizens lost out. They have subpoenaed banks for information, a demand that Royal Bank of Scotland is fighting, citing data privacy laws in the UK.

Japan: the Financial Services Agency in Tokyo imposed sanctions on Citigroup and UBS for attempted manipulation in December 2011.

Switzerland: the Competition Commission is investigating whether traders at 12 financial institutions rigged Libor and Tibor to manipulatemarket conditions regarding derivative products based on these reference rates”.

EU: the European Commission has opened a cartel investigation to see whether banks colluded to set Euribor and Libor. It is also closing loopholes to specifically criminalise the rigging of benchmark rates.

Germany: financial regulator BaFin is probing Libor and Euribor rigging.

Netherlands: the central bank is examining submissions to Euribor.

Additional reporting by Brooke Masters, Patrick Jenkins, Kara Scannell, Caroline Binham, Michael Mackenzie, Daniel Schäfer, Ben McLannahan, Michiyo Nakamoto and Jeremy Grant

Copyright The Financial Times Limited 2012

Bye-Bye, Middle East?

Zaki Laïdi

07 December 2012


PARISFor some time now, a certain strategic vision has been gaining traction: the United States is becoming energy-independent, paving the way for its political retreat from the Middle East and justifying its strategicpivot” toward Asia. This view seems intuitively correct, but is it?
Energy-hungry America has long depended on the global market to meet domestic demand. In 2005, the US imported 60% of the energy that it consumed. Since then, however, the share of imports has decreased, and it should continue to do so. The US is expected to become energy self-sufficient in 2020, and to become an oil exporter by 2030.
This scenario would grant the US three enormous advantages. It would enhance US economic competitiveness, especially relative to Europe, given the lower costs involved in the extraction of shale gas. It would also reduce America’s exposure to growing unrest in the Arab world. Finally, it would increase the relative vulnerability of America’s main strategic rival, China, which is becoming increasingly dependent on Middle East energy supplies.
These facts obviously need to be taken seriously, but their implications for US foreign policy in the Middle East should not be too hastily drawn. Above all, though energy dependence is a key element of US policy in the region, it is far from being the only factor. Israel’s security and the desire to contain Iran are equally important.
Moreover, the Middle East’s role in the global geopolitics of energy will grow in the coming decades, making it difficult to see how a superpower like the US could simply walk away from the region. Within the next 15 years, OPEC countries will account for 50% of global oil production, compared to only 42% today. Furthermore, the country on which this increase will most likely hinge is Iraq.
Could the US ignore a country that in roughly ten years will become the world’s second-largest oil exporter, generating more than $200 billion annually in revenue, while increasingly being dominated by an authoritarian Shia regime that is close to Iran? Would it withdraw in the face of the consequent strategic threat to its three alliesSaudi Arabia, Turkey, and Israel – in the region?
Such a possibility seems even more far-fetched as long as the Iranian nuclear crisis remains unresolved and the Syrian crisis continues to widen the region’s Shia-Sunni divide (reflected in increased tension between Turkey and Iran). Even as US President Barack Obama was visiting Asia in November – a trip meant to underscore America’spivot” – he was forced to devote considerable time and attention to mediating a cease-fire between Israel and Hamas in Gaza.
Indeed, if oil were truly America’s only or paramount interest in the Middle East, its special relationship with Israel would be mystifying, given the harm that it implies for US interests among Arab oil exporters. Even when its energy dependence on the Middle East was at its peak, the US rarely altered its policy of support for Israel.
It is also important to bear in mind that in 1973, the US suffered less from the OPEC oil embargo than Europe did, even though America, which had resupplied Israel in its war with Egypt and Syria in October of that year, was the primary target. In the end, America’s position in the region strengthened after Egypt became a US ally and made peace with Israel.
China’s growing interest in the Middle East also decreases the likelihood of an American withdrawal. The US will remain concerned about ensuring the security of energy supplies for its Asian allies, which, like China, are increasingly dependent on the region’s oil exporters.
Nevertheless, while an American withdrawal from the Middle East seems highly unlikely, US exposure to the region will indeed decline; as that happens, America’s role there will probably become more subdued – and perhaps more cynical. Its involvement in the Israeli-Palestinian conflict will likely be limited to maintaining the status quo rather than seeking a comprehensive settlement.
This stancesuggested by America’s opposition to granting Palestine observer-state status at the United Nations – would amount to an admission by the US that it has given up on the creation of two states in the Middle East. That would certainly satisfy Israeli Prime Minister Binyamin Netanyahu and the Palestinian fringe seeking to weaken the Palestinian Authority. But it would fully vindicate those who believe that Obama is more a man of good will than a visionary.

Zaki Laïdi is Professor of International Relations at Institut d’études politiques de Paris (Sciences Po), and the author of Limited Achievements: Obama's Foreign Policy.

Copyright Project Syndicate -

Note from the editor

Latin America catches the gold bug

By Jack Farchy

Central bank reserve managers are a conservative bunch: once they fix on a certain policy it can take a long time to change course.

They also tend to move in herds, with new ideas catching on by region.

In 2009, for example, China announced it had been buying gold and India purchased 200 tonnes from the IMF. Since then Thailand, South Korea, Sri Lanka and Bangladesh have all bought significant quantities for the first time in years, making Asian central banks the main driver of “official sectorpurchasing.

Now the gold bug appears to be catching in Latin America.

The trendsetter was Mexico, which last year snapped up close to 100 tonnes in a couple of months. More recently Brazil, holder of the region’s largest international reserves, has joined the party. In September and October, according to IMF data, the central bank bought 18.9 tonnes.

“We bought some gold,” Alexandre Tombini, central bank governor, confirmed to journalists recently in Brasília.

Yet Brazil appears to have much further to go: gold still accounts for just 0.8 per cent of its reserves of $379bn, the world’s eighth-largest. Of the 20 largest holders of international reserves, it has more gold than only Hong Kong and Malaysia.

Indeed, Mr Tombini acknowledged as much, saying that the central bank was “looking into this issue [of reserve diversification] on a current basis”.

The shift by Mexico and now Brazil could prompt some of their neighbours to reconsider gold as well.

A wave of gold buying among Latin American central banks is likely to be of less significance to the market than the trend in Asia has been, simply because a larger proportion of the world’s reserves are held by Asian countries.

Nonetheless, consistent buying by central banks – often through the Bank for International Settlements – is one of the main factors propping up the gold market. New buyers from Latin America could help maintain the current pace of roughly 500 tonnes per yearequivalent to the jewellery consumption of Europe and North America combined.

A few have already begun to dip their toes in. Paraguay bought 7.5 tonnes in July, while Argentina added 7 tonnes last year and Colombia purchased 2.3 tonnes.

But others haveso farremained on the sidelines. Notably Peru, holder of the third-largest international reserves in the region at $61bn, has not bought the yellow metal since 2001. And Chile, with reserves of $40bn, holds less than one tonne of gold.

Pisco sours, anyone?