UK: LIBOR Manipulation Coverage - December 2012

Last Updated: 2 January 2013
Article by James Cooper

Investigations and regulator action

The first arrests in relation to the LIBOR scandal have been made, with three men, all British nationals, being detained, and the SFO issuing search warrants for three properties in the South East of England. Those arrested were Tom Hayes, an ex-UBS trader who specialised in products pegged to yen-denominated LIBOR, and Terry Farr and Jim Gilmour (both employees at RP Martin, a London-based interdealer broker). All are believed to be known to one another, and such a development is a clear indication that the scandal has now spread from institutions, with the authorities setting their sights on wrongdoing by individuals.

The SFO has at least 40 staff working on LIBOR-related investigations with recent reports having suggested the imminent arrest of traders at RBS, Barclays and UBS. David Green, head of the SFO, had suggested earlier this month that "significant developments" were coming "in the near future". US authorities are also said to be looking at whether to charge individuals in connection with their investigation of LIBOR rate-fixing.

UBS is expected to reach a settlement soon to settle charges of LIBOR manipulation, with widespread reports that it could amount to GBP 620 million (USD 1 Billion) or more. It appears this "global settlement" would be to settle the allegations and investigations brought by UK, US, Swiss and possibly Canadian authorities.

The steep fine – which would be more than double that imposed on Barclays - is surprising as the bank has cooperated with law-enforcement agencies in their probes since 2011, according to regulatory filings and court documents. The bank received conditional immunity from the US antitrust authorities and other international competition authorities in return, which suggests the bank's USD 1 billion payout could have been higher without that leniency.

Some clues as to UBS's alleged central role in the LIBOR conspiracy were included in documents filed earlier this year by the Canadian Competition Bureau, which investigates anti-competitive activity. The documents describe how a "cooperating party" tried to artificially move yen LIBOR. UBS is the cooperating bank, people familiar with the situation have said. The mention of yen-related LIBOR is consistent with the above-mentioned arrest of Tom Hayes.

Thomson Reuters, the data provider which currently calculates and distributes the LIBOR rates on behalf of the BBA, wants to run a toughened new system after being assured by UK regulators that it is not being investigated over attempts to rig global interest rates. It is set to join its main rival Bloomberg amongst the bidders to operate the new system. The London Stock Exchange and NYSE Euronext are also rumoured to be interested in the role.

The FSA has proposed that the future administration of LIBOR be operated by a private organisation other than the BBA. The FSA wants to establish links between submissions from banks and actual transactions on markets to boost LIBOR's credibility.

The FSA has published a consultation paper proposing new rules and regulations for financial benchmarks, including rules for the prevention of future manipulation of LIBOR. These include the creation of conflict of interest policies and appropriate systems and controls for submitting banks, broadening participation in the rate and establishing benchmark administrators to monitor activity and corroborate submissions. Another proposal put forward by the FSA is to compel those banks which do not volunteer to submit rates to LIBOR to do so, with the aim being to increase the number of participants and thus make it more difficult to manipulate LIBOR. The consultation is open until 16 January 2013, with a final Policy Statement anticipated in March 2013.

RBS is widely expected to be the next bank to settle with regulators, with a fine of reportedly up to GBP 350 million. It has said that, despite any future settlements, it will take at least three further years to complete a turnaround at the bank, and is preparing itself for a "miserable day" when details of RBS' involvement in LIBOR and the settlement figures are announced. The reports follow news that Swiss authorities are investigating 12 banks over suspicions of collusion to manipulate inter-banking lending rates, including RBS and HSBC.

Reports show that the European Union may shortly make formal allegations against a number of banks for colluding to manipulate the EURIBOR rate. Sources indicate that manipulation of EURIBOR was widespread, although there have been no formal comments from banks as to this development.

German lawmakers heard evidence from Stephan Leithner, chief compliance officer at Deutsche Bank, as well as former board member Hugo Baenziger, as German parliamentarians continued to investigate the extent of manipulation of global benchmark rates. While Deutsche Bank has said that it is cooperating with investigators in both the US and Europe, it has also admitted that two former traders may have colluded to manipulate global interest rates. German politicians have called for stronger regulation of LIBOR and other benchmark rates, in the wake of LIBOR manipulation allegations. The Finance Committee, of the German Bundestag's lower house, questioned Mr Leithner after it was announced by Deutsche Bank that Co-Chief Executive Anshu Jain would not be attending the hearings. The move by Mr Jain has been criticised by members of the industry, including Josef Ackermann, former head of the German lender. Following the hearing, the German politicians were left unimpressed, calling the responses from the bankers "anorexic" and accusing banks of not answering questions more openly because of a fear that doing so might damage banks' reputations. Raimund Roeseler, Chief of Banking Supervision at BaFin, the German financial regulator, said at the hearing that banks "probably" fixed LIBOR, as probes continue into the various allegations.

Deutsche Bank has confirmed that it has set aside reserves for possible damages stemming from LIBOR manipulation allegations. Stephan Leithner made the comments at the hearing before the Finance Committee of the German Bundestag. The bank has also reiterated that there is no evidence that senior management at the bank had colluded to manipulate benchmark rates or behaved inappropriately.

Industry response

The arm of the European Banking Federation (EBF) which runs the EURIBOR benchmark has said that banks in Europe are nervous about their continued participation on rate-setting panels, and there are threats to quit such panels amidst continued investigations of claims of manipulation of benchmark rates. Whilst more than 40 banks remain on the EURIBOR panel, the comments from the EBF reflect the uncertainty that remains over the future of such benchmark lending rates.

The Global Financial Markets Association (GFMA) has released a "best practices" and standards report, in respect of benchmark price assessments. The final report was published following discussions with banks and other participants to the rate setting process. The overriding principles promulgated by the GFMA are that: (i) administrators of benchmark rates should establish and maintain an appropriate governance system for effective oversight; (ii) the administrator should ensure that the contributing banks understand their roles and responsibilities; and (iii) the process for rate-setting should be transparent.


All eyes are on UBS and the eye-watering settlement it is expected to reach with global regulators in the context of its involvement with the manipulation of LIBOR. RBS will likely follow next, though this could reportedly be announced in January rather than by year end. Deutsche Bank has faced some uncomfortable scrutiny by German lawmakers in its role in the scandal, and so it remains to be seen what other settlements emerge over the coming weeks. All told, 2012 has been a tumultuous year for the banks, the likes of which we may not see again for a very long time, if indeed ever. Whilst the repercussions will be felt for (what feels like will be) an eternity, and certainly well into the New Year, many of those who have been involved, both poacher and gamekeeper alike, will no doubt breathe a small sigh of relief that this year is nearly over.

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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