UK: Professional & Financial Lines - Weekly Bulletin - October 2012

Last Updated: 16 October 2012
Article by James Cooper

LIBOR manipulation coverage

Investigations and regulator action

The European Parliament's Economic and Monetary Affairs Committee has voiced support for stricter punishments for market abusers, including a minimum five year custodial sentence, in an effort to curb market manipulation. In response to low market confidence and calls for increased regulatory oversight, EU lawmakers have also backed the use of fines and administrative sanctions against market abusers, saying that self-regulation has become untenable. These proposals come on the back of calls by Michel Barnier, EU Commissioner for the Internal Market and Services, for nations to streamline their financial penalties to avoid marked differences in their approach to enforcement, and for the bloc generally to strengthen sanctions against market abusers.

Peter Shapiro, managing director of the Swap Financial Group in New Jersey, says that U.S. states and localities which purchased interest rate swaps based on LIBOR will suffer a loss of approximately US $6 billion. These losses will add to the US $4 billion which such states and localities have already paid out to taxpayers. Before the credit crunch hit in 2008, banks sold approximately US $500 billion worth of swaps to U.S. states and localities, with US $200 billion of those derivatives tied to LIBOR. Since Barclays paid a record settlement in June 2012, no fewer than five U.S. states have commenced investigations into LIBOR.

Investigations into RBS and its role in the LIBOR affair are unlikely to be settled before 2013, as the bank has not been able to agree a deal with the various regulators involved. RBS had initially hoped to enter into a collective settlement deal, but it appears more likely that it will have to settle individually with regulators. Finance industry stakeholders have said that settlement negotiations have stalled because regulators are working to different timeframes and with different objectives. Regulators have also taken different approaches to gathering evidence in the course of their investigations, notably in how and when to interview key witnesses.

Sweden's Financial Supervisory Authority has said that Sweden's banks should retain responsibility for setting Swedish inter-bank lending rates, saying that ultimately the issue with benchmark rates is the credibility of banks with borrowers. To date, there has been no indication that the Swedish inter-bank lending rate has been manipulated. The rate serves as the base rate for approximately US $6 trillion in financial contracts in Sweden.

The recommendations made last week by an EU advisory group in relation to ring-fencing of banks' retail lending activities have received support from the German market regulator Bafin. Last week, an advisory group led by Bank of Finland Governor, Erkki Liikanen called for riskier activities of banks to be separated from deposit-taking business. Bafin said that regulators should consider the proposals because it would not require large-scale changes to the traditional banking model.

The deadline for applications for individuals to register their interest in assuming the position of governor of the Bank of England passed on Monday, 8 October 2012. Deputy Governor, Paul Tucker remains the favourite to succeed Mervyn King, as other potential candidates, including Jim O'Neill and Gus O'Donnell, admitted that they did not apply. Other challengers include FSA Chairman, Adair Turner and John Vickers, Chairman of the Independent Commission on Banking. It is also thought that two overseas bankers, Mark Carney (head of the Bank of Canada) and Glenn Stevens (head of the Reserve Bank of Australia), are also in contention for the role. The final list of applicants has not been confirmed by HM Treasury, although it is expected that a decision on Mr King's successor will be made by the end of the year.

To read an opinion article on the development of LIBOR from its origins in 1797, please go to http://www.bloomberg.com/news/2012-10-05/tracking-libor-s-descent-from-britain-s-1797-bank-rate.html

Industry response

Sir Roger Carr, President of the employers' group at the Confederation for British Industry, has called for businesses to raise their ethical standards.

Kevin Milne, the former head of clearing at the London Stock Exchange, has been hired as chief executive of Rate Validation Services, a new start-up company which plans to offer an alternative rate to LIBOR. Rate Validation, which is based in Singapore, said that it offers a competitive alternative to LIBOR because it calculates its rate according to actual rates banks are using when trading with one another, rather than estimates. Mr Milne's role will focus particularly on growth for Rate Validation in Europe.

Reports suggest that RBS has suspended Chong Wen Kuang, a senior trader at RBS Singapore, for attempting to fix the Singapore-dollar swap offer rate. Mr Chong is the first RBS employee to have been disciplined for fixing rates other than LIBOR. RBS is continuing its investigation into its rate setting procedure.

In recent months, the LIBOR rate has been set by a small group of six banks almost exclusively, including Bank of America, Royal Bank of Canada and Lloyds, raising industry concerns over the status of LIBOR as an accurate barometer of true borrowing costs and financial health. The recommendations set out in the recent Wheatley Report include increasing the number of banks which sit on the panel and contribute to the setting of LIBOR. It was also proposed that the FSA compel firms to contribute to the rate, to ensure that it reflects the lending activities of as wide a range of lenders as possible. This will also take into account the fact that borrowing rates have diverged in recent times as banks have increasingly required collateral with inter-bank lending transactions.

Barclays coverage

Commercial

Barclays has made changes to its securities businesses, with the fixed income, commodities and equities operations being combined into a single market business. Other organisational changes include the promotions of Skip McGee to chief executive of corporate and investment banking in the Americas and Jerry Donini to chief operating officer of corporate and investment banking. There will also be a single executive committee going forward for the corporate and investment banking operations.

Barclays head, Antony Jenkins has called for banks to prove to consumers that banking institutions can be "socially useful." Whilst recognising that Barclays faces a struggle to regain market confidence, Mr Jenkins believes that it can be done through honest banking based on a culture of integrity.

Barclays has agreed to take on the assets and mortgage loans of ING Direct, the online bank. No purchase price was disclosed. The move comes in anticipation of new rules requiring 'fire-breaks' around consumer lending operations that would come into force in 2019 under the Vickers proposals. The acquisition also reflects the intention of CEO Antony Jenkins to focus more on traditional deposit-taking business rather than riskier investment banking business. As part of this ongoing review into its business structure and operations, Barclays has also decided to close down its shipping unit, Pendle Shipping. This follows promises by Mr Jenkins to sell or scale bank certain bank operations.

Comment

European law reform on LIBOR is gathering pace with an ECON vote this week in support of jail terms for those found guilty of serious cases of insider dealing and market manipulation. Fines and other sanctions would also be available. Meanwhile, the UK Government has announced that financial services fines (in excess of enforcement case costs) will no longer be directed back into the industry. £35 million of fines revenue relating to attempted LIBOR manipulation has been earmarked to support Britain's Armed Forces, and in future, regulatory fines (excluding enforcement case costs) for the year will go to the Exchequer. A political move to appease the voters, no doubt, but one which will ultimately hit the financial services sector since the coffers will no longer be bolstered by those who have been penalised to reduce the fees that regulated firms are charged each year.

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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