UK: Professional & Financial Lines - LIBOR Bulletin

LIBOR manipulation coverage

Investigations and regulator action

The British Bankers' Association (BBA) has issued a consultation paper responding to the proposal made in the Wheatley Report that the number of currencies and maturities for which submissions are made should be cut substantially. The paper proposes that most LIBOR rates be phased out by April 2013, with the aim being to reduce the number of rates from 150 to 30. The BBA has recommended that 30 rates be kept following discussions it has had with market stakeholders. The only currencies which the BBA proposes to keep are the Euro, Japanese Yen, Pound Sterling, Swiss Franc and US Dollar rate LIBOR.

Reports indicate that the SFO is likely to arrest former traders and rate setters at UBS, RBS and Barclays, and will do so within the next month, as prosecutors step up efforts to investigate the manipulation of LIBOR. The SFO investigation, which commenced in July following a request from British lawmakers, will focus on the most blatant attempts to manipulate benchmark rates, with investigations into less significant offenders to follow. The SFO is working with the US Department of Justice, US Federal Bureau of Investigation and City of London police. David Green, Director of the SFO, has said that the agency is considering bringing charges of conspiracy to defraud, although any such charges will likely only be brought against individuals, rather than firms, as the SFO will face the evidential barrier of showing that a "controlling mind" at a particular firm knew of the rate manipulation. Any such arrests made by the SFO will allow the agency to question individuals under caution and thus assess whether it is able to bring formal charges.

The Monetary Authority of Singapore (MAS) has asked Citigroup to provide information and other documentary evidence showing its data submissions for benchmark rates, including LIBOR. Citigroup made the announcement in its quarterly filing with the SEC, saying that the Singapore regulator is now one of several global regulators investigating how Citigroup contributed to the setting of benchmark rates.

The Securities and Exchange Surveillance Commission in Japan will be carrying out a routine inspection of RBS' brokerage unit in Tokyo, and this will include a review into possible efforts to manipulate benchmark rates, such as LIBOR and TIBOR. There has been no official comment on this probe by Japanese regulators, and there has been no official accusation that RBS' Japanese unit has manipulated interbank lending rates.

The Financial Times reports that John Cridland, director-general of the UK employers' organisation CBI, has called for British lawmakers to introduce legislation which will limit compensation payouts from banks by curbing the legal time limit on claims. Mr Cridland has expressed his concern that companies will seek compensation from banks which mis-sold them products tied to LIBOR, in the knowledge that LIBOR had been manipulated. While Mr Cridland supports reform of LIBOR, he says that it would be a dangerous precedent if banks were to be held accountable for the products that it sold which were linked to LIBOR.

RBS has said that it expects relatively soon to enter into a settlement with regulators over allegations that it manipulated LIBOR. It is unknown if any fine imposed will exceed the £290 million fine incurred by Barclays in June. RBS has fired four traders following an internal review, including its head trader for the Europe and Asia-Pacific region.

UBS has said that it is under investigation in Singapore following allegations that it manipulated LIBOR. The Swiss bank said during its third quarter earnings report that MAS had requested that the Association of Banks in Singapore review their rate-setting process, with particular focus on the Singapore Inter-Bank Offer Rate (SIBOR) and the Swap Offer Rate (SOR). MAS has ordered banks to report any irregularities they discover and impose appropriate disciplinary punishment against staff involved.

Following the LIBOR affair and other recent banking scandals, the Financial Stability Board, which is the task force set up by the Group of 20 (G20), has called for banks to set aside more capital in order to adequately hedge against operational risks, including fraud and money laundering. These requirements will be extra to the Basel III requirements being introduced from January 2013, with the FSB making a final report on its findings in 2015.

Catherine Brown, head of human resources at the Bank of England, has emerged as the favourite to take over the role of Chief Operating Officer at the Bank. Confirmation of the appointment of COO will not be made until next year, when a new Governor will be announced.

Industry response

The European Repo Council, a representative body for banks such as Deutsche Bank and Goldman Sachs, has approached the European Central Bank with a view to discussing alternatives to LIBOR and its European equivalent, EURIBOR. Discussions have focused on establishing a benchmark rate based on actual "secured market" trades, such as bonds or shares issued as security for loans. The group that oversees EURIBOR, which is an arm of the European Banking Federation (EBF), is also looking at ways to improve governance and oversight of the rate-setting process.

Antonio Horta-Osorio, Chief Executive of Lloyds Bank, and Stephen Hester, Chief Executive of RBS, will appear before the Parliamentary Commission on Banking Standards to discuss banking standards and sales practices. John Vickers, whose review led to the proposal that banks should ring-fence traditional deposit-taking activities from riskier investment banking operations, will also give evidence before the Commission.

Commerzbank has announced changes to its internal operations which it says will make the process of reporting rates for EURIBOR more objective and transparent. Martin Blessing, Chief Executive at Commerzbank, has said that while no irregularities have been identified with its rate-setting process, it has taken the step of adding another level of internal security to reduce the opportunities for manipulation of rate submissions.

Derivatives traders have said that the best model for derivatives trading can be found in Chicago, with calls being made to transform the privately traded swaps market so that it resembles that of the futures contract market. Industry experts have said that big banks dominate the market for privately traded derivatives, but an exchange-driven model, such as that found in Chicago, offers transparency and extra liquidity. As a result of these benefits, and lower market confidence in banks as a result of the LIBOR revelations, experts have already seen a shift in the amount of business going to futures and away from the traditional model.

Comment

LIBOR coverage over the last two weeks has picked up key developments in the UK including demonstrable activity in the area of Martin Wheatley's recommendations and also signs of action from the SFO which is working with the US Department of Justice, US Federal Bureau of Investigation and City of London police. The CBI, on the other hand, has called for British lawmakers to introduce legislation which will limit compensation payouts from banks by curbing time limits for claims for fear that a 'dangerous precedent' may be set if banks were to be held responsible for products they sold that related to LIBOR. Perhaps the CBI's is a lone voice in a sea of criticism, but one which may gain some traction over time.

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