December 9, 2012 7:38 pm
Compound interest: the global rate-rigging probe
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 suspended – all 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 “reprehensible” behaviour 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.
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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 report “co-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 lowballing – submitting 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 traders – requesting 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 Min – also 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.
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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 fixed – which 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 manipulate “market 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