Worldwide: Professional & Financial Lines - August 2012

Last Updated: 24 August 2012
Article by James Cooper

LIBOR manipulation coverage

International Regulatory Investigations

It has emerged that seven banks are to be questioned by U.S authorities as part of ongoing investigations into alleged manipulation of Libor. The attorneys general of New York and Connecticut have sent subpoenas to Barclays, Citigroup, Deutsche Bank, JPMorgan, HSBC, Royal Bank of Scotland and UBS. It has been reported that the investigation is based upon the assumption that other banks must have conspired with Barclays to manipulate Libor rates. Any criminal charges brought could strengthen the civil cases of investors seeking damages for losses caused by any rate-rigging. Ralph Silva, a banking analyst at SRN, stated that this is the first legal case attempting to prove collusion. Ian Gordon, an analyst at Investec, commented that there is "plenty more reputational damage and regulatory fines coming down the pipe". However, he added that for Barclays the issue was now largely in the past.

A German news source has reported that the chairman of UBS has said that the bank is not currently in Libor settlement talks with authorities. Chairman, Axel Weber said that UBS received "conditional immunity" as a result of being the first bank to go the authorities with grounds for suspicion of manipulation of Libor rates in 2010.

Jay V Merchant, an ex-Barclays trader who has come under federal scrutiny in relation to the Libor scandal, has left his position as head of swap trading at UBS. Reuters recently reported that Ryan Reich, another former Barclays trader, had "cooperated" with federal criminal investigations into the Libor scandal. Reich was supervised by Merchant, amongst others, at Barclays.

Treasury Committee Libor Report

On 18 August 2012, the House of Commons Treasury Select Committee published Volume I of a report entitled 'Fixing LIBOR: some preliminary findings'. (Volume II was subsequently published on 21 August 2012.) The report sets out in detail a number of issues relating to Barclays' conduct and the FSA's investigation into the manipulation of Libor. It includes discussion of amending the current law by widening the market abuse regime to include the manipulation, or attempted manipulation, of Libor and other benchmark rates. It also raises the consideration of widening the definition of section 397 of the Financial Services and Markets Act 2000 (FSMA) to cover conduct that is intentional or reckless manipulation of Libor and other benchmarks. Another issue highlighted in the report is the possibility of a legislative gap between the Serious Fraud Office and the FSA in the context of taking responsibility for investigating serious fraud in the financial markets.

FSA Review

The British Bankers' Association has reportedly stated that it will forward the findings of its review into Libor to Martin Wheatley of the FSA. Wheatley's discussion paper examining how Libor is set and regulated was published on 10 August 2012. In it, one of the proposals under consideration is to consider whether setting the Libor rate should be brought in future under FSMA as a regulated activity. Interested parties have until 7 September 2012 to respond to the FSA's paper.


The Financial Times has reported that, following the Libor scandal, Deputy Prime Minister, Nick Clegg and Business Secretary, Vince Cable want to reopen the debate on UK banking reform.

An Australian news source has reported that, in light of the Libor scandal, technical staff at the European Central Bank have been studying New Zealand's trade-based interbank rate. It is reported that Paul Atmore, CEO of the New Zealand Financial Markets Association, is due to visit the Bank of England in the coming weeks to discuss the system.

The Municipal Securities Rulemaking Board, the watchdog for the U.S. municipal bond market, announced that it will review how market indices are prepared in the wake of the Libor scandal.

Commercial news

The rating agency, Standard and Poor's (S&P) has commented that as a result of a series of scandals, including the Libor manipulation allegations, British banks have damaged their recovery from the financial crisis. S&P reported that British banks have 'come a long way' in strengthening their balance sheets since 2008, however they added that recovery is slower than expected due to one-off charges such as compensation bills and fines. Referring to the Libor scandal, S&P stated that it anticipates material regulatory penalties for other banks besides Barclays.

Reuters reports that Johnson Associates, the compensation consulting firm, has predicted that bonuses will be impacted at firms which have been associated with scandals such as the Libor manipulation allegations. Johnson Associates said: "Libor scandal, errant trades and other high profile errors and losses weighs on an already hampered investor confidence...".

Barclays coverage

Response to TSC report

Bob Diamond, former Barclays chief, has hit back at claims by the Treasury Select Committee (TSC) in their recently published report that he was "highly selective" in giving his oral evidence. Diamond stated that he strongly challenged certain assertions about his testimony, saying that he "answered every question that was put to me truthfully, candidly and based on information available to me". In particular, Diamond defended attacks by MPs on the bank's culture and character. Barclays has said in a statement that it will carefully consider the TSC report and that: "Whilst we don't expect to agree with every finding in it, we recognise that change is required, not least to restore stakeholder trust."


The reputation of the UK banking industry is under fire from all sides, which has the potential to undermine the UK's important role in global banking for a very long time to come. The TSC report is a damning account of the failure by the relevant authorities (the FSA and the Bank of England) to focus their attention on the issue of possible Libor manipulation, engaged instead in crisis management and the avoidance of bank failure during the financial crisis. The report even highlights the "dysfunctional relationship between the Bank of England and the FSA which existed at that time". It is clearly apparent that there was an endemic cultural issue within the banks in fixing Libor rates. Any future reform of how such an index is set ought to ensure that the rate-setters are using less 'guesswork' and more 'real trading' numbers. Oversight of the process should be far more robust and operate within a stronger regime of overall governance. Failure to do this, to appease the rest of the financial world, will leave the UK in a weak position to defend why it should retain control of setting such a global, multi-trillion dollar benchmark.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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