Interdealer brokers, the middlemen who line up buyers and sellers of securities for banks, are emerging as key enablers in the Libor scandal after three firms paid a total of $2.6 billion for rigging global interest rates.
Employees at firms including ICAP Plc, the world’s biggest interdealer broker, and RP Martin Group Ltd., a smaller British competitor, passed on requests from derivatives traders asking rate-setters at others banks to make favorable submissions, e- mails released as part of the global probe of interest rate- rigging show. In some cases, the middlemen took bribes as payment for the services in the form of so-called wash trades, regulators said, without identifying the firms that did.
The London interbank offered rate is the basis for more than $300 trillion of securities. The banks that set the rate stand accused of rigging it for years to boost profits. Five years after alarm bells first sounded, regulators are handing out fines and criminal sanctions to those responsible for rate manipulation. This story is featured in the March issue of Bloomberg Markets Magazine. Bloomberg Television's Mark Barton reports. (Source: Bloomberg)
Audio Download: Libor Banks Should Consider Deal With Victims: View, 2/1
The brokers assumed greater influence as credit markets froze at the start of the financial crisis in 2007. Bankers charged with making submissions to the London interbank offered rate increasingly relied on information from the brokers to determine what figures to contribute. That left the benchmark vulnerable to manipulation by traders trying to profit from bets on derivatives. The outcome of those bets often depended on where the Libor rate fell on International Money Market dates, or IMMs, the quarterly dates when futures contracts settle.
“I really need a low 3m jpy libor into the imm...” one trader e-mailed a broker on March 3, 2010, according to a transcript of a conversation released by the U.S. Department of Justice when Royal Bank of Scotland Group Plc paid a $612 million fine for interest-rate rigging on Feb. 6. “Any favours you can get with [Submitter-1] would be much appreciated...”
‘Steak’ Offered
That discussion was between Tom Hayes, the former UBS AG and Citigroup Inc. trader arrested in December over his alleged role in the scandal, and Brent Davies, an employee at ICAP in London, according to three people with knowledge of the matter. The submitter was Paul White, an employee at Edinburgh-based RBS, said the people, who asked not to be identified because they weren’t authorized to speak publicly.
Later that day, Davies asked White if there was “any chance at all” he could lower his rate, adding “if u cud see ur way to a small drop there might be a steak in it for ya,” the transcript shows.
In the exchange, White said his rate should be unchanged. The next day he lowered his three-month yen Libor submission by 1 basis point, according to the regulator. A basis point is the equivalent of 0.01 percentage point.
Wash Trades
White declined to comment as did lawyers for Hayes and Davies. Davies, who isn’t under investigation by any regulator, joined ICAP in September 2009 and was suspended on full pay from January 2012, one of the people said. ICAP is being investigated by Britain’s Financial Services Authority as well as Canada’s Competition Bureau.
The firm has put three more employees on paid leave, Chief Executive Officer Michael Spencer told reporters on a conference call yesterday after the firm said trading volume increased in January. He said the London-based firm has led its own internal investigation and declined to comment on any other probes.
Employees at firms including ICAP Plc, the world’s biggest interdealer broker, and RP Martin Group Ltd., a smaller British competitor, passed on requests from derivatives traders asking rate-setters at others banks to make favorable submissions, e- mails released as part of the global probe of interest rate- rigging show. In some cases, the middlemen took bribes as payment for the services in the form of so-called wash trades, regulators said, without identifying the firms that did.
The London interbank offered rate is the basis for more than $300 trillion of securities. The banks that set the rate stand accused of rigging it for years to boost profits. Five years after alarm bells first sounded, regulators are handing out fines and criminal sanctions to those responsible for rate manipulation. This story is featured in the March issue of Bloomberg Markets Magazine. Bloomberg Television's Mark Barton reports. (Source: Bloomberg)
Audio Download: Libor Banks Should Consider Deal With Victims: View, 2/1
The brokers assumed greater influence as credit markets froze at the start of the financial crisis in 2007. Bankers charged with making submissions to the London interbank offered rate increasingly relied on information from the brokers to determine what figures to contribute. That left the benchmark vulnerable to manipulation by traders trying to profit from bets on derivatives. The outcome of those bets often depended on where the Libor rate fell on International Money Market dates, or IMMs, the quarterly dates when futures contracts settle.
‘Steak’ Offered
That discussion was between Tom Hayes, the former UBS AG and Citigroup Inc. trader arrested in December over his alleged role in the scandal, and Brent Davies, an employee at ICAP in London, according to three people with knowledge of the matter. The submitter was Paul White, an employee at Edinburgh-based RBS, said the people, who asked not to be identified because they weren’t authorized to speak publicly.
Later that day, Davies asked White if there was “any chance at all” he could lower his rate, adding “if u cud see ur way to a small drop there might be a steak in it for ya,” the transcript shows.
In the exchange, White said his rate should be unchanged. The next day he lowered his three-month yen Libor submission by 1 basis point, according to the regulator. A basis point is the equivalent of 0.01 percentage point.
Wash Trades
White declined to comment as did lawyers for Hayes and Davies. Davies, who isn’t under investigation by any regulator, joined ICAP in September 2009 and was suspended on full pay from January 2012, one of the people said. ICAP is being investigated by Britain’s Financial Services Authority as well as Canada’s Competition Bureau.
The firm has put three more employees on paid leave, Chief Executive Officer Michael Spencer told reporters on a conference call yesterday after the firm said trading volume increased in January. He said the London-based firm has led its own internal investigation and declined to comment on any other probes.
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