It’s the end of the first week of January and we want to end on an upbeat note. So what do we get as this morning’s headlines? A whole heap of dross about LIBOR, a sprinkling of stuff about mis-selling insurances and illegal mortgage foreclosures (read things worth reading every day if you want to keep up with these headlines).
That’s not a great way to start the year but then you have to remember that this is nothing to do with 2013 or the future, except in the way in which regulators will want to change the way they regulate the markets. No, the daily headlines all relate to issues raised before 2010.
The most heinous of these issues that will dog the industry deadlines for most of this year will be LIBOR fixing.
LIBOR is the London Inter Bank Offered Rate.
This is the rate at which banks in London lend money to each other for the short-term in a particular currency, with a new rate calculated every morning by Thomson Reuters based on interest rates provided by members of the British Bankers Association.
LIBOR fixing took place from 2005 to 2010, although it started a long-time before this as a gentlemanly protocol for agreeing the rates at which banks buy and sell to each other, and at what rates.
It’s fairly obvious that LIBOR was open to manipulation from an early time, as it is purely a rate set by a small clique of traders. The reason why this became important is that the gentlemanly method of setting rates became the global standard for rate setting, resulting in all financial contracts and pretty much the whole financial market being based upon this morning agreement between a roundtable of the world’s largest banks.
Trillions of dollars of interest rates tied to LIBOR agreements, influencing the way in which everything from government sovereign debt to our credit card rates were set.
The problem of a small group of banks being able to fix such rates did not come to light however until it became absolutely necessary, and that was when Lehmans collapsed.
And the problem was raised by Barclays who were first mover to co-operate with the authorities which is why they got a fine of less than $500 million, whilst most will get fines of over a billion.
The British Bankers' Association (BBA) publishes the first official Libor rates in dollars, sterling and yen, meeting demand for global benchmarks from financial markets.
Barclays are actively engaged in LIBOR fixing
As early as 2005 there was evidence Barclays had tried to manipulate dollar Libor and Euribor (the eurozone's equivalent of Libor) rates at the request of its derivatives traders and other banks.
Misconduct was widespread, involving staff in New York, London and Tokyo as well as external traders.
Between January 2005 and June 2009, Barclays derivatives traders made a total of 257 requests to fix Libor and Euribor rates, according to a report by the FSA.
One Barclays trader told a trader from another bank in relation to three-month dollar Libor: "duuuude... what's up with ur guys 34.5 3m fix... tell him to get it up!".
Barclays alerts US regulators about its concerns that other banks are submitting dishonestly low interbank rates.
From as early as 28 August, the New York Fed said it had received mass-distribution emails that suggested that Libor submissions were being set unrealistically low by the banks.
On 28 November, a senior submitter at Barclays wrote in an internal email that "Libors are not reflecting the true cost of money", according to the FSA.
In December, a Barclays compliance officer contacted the UK banking lobby group British Bankers' Association (BBA) and the FSA and described "problematic actions" by other banks, saying they appeared to be understating their Libor submissions, according to US regulator the Commodity Futures Trading Commission (CFTC).
On 6 December, a Barclays compliance officer contacted the FSA, according to the FSA report, to express concern about the Libor rates being submitted by other banks, but did not inform the FSA that its own submissions were incorrect, instead saying that they were "within a reasonable range".
The FSA said that the same compliance officer then told Barclays senior management that he told the FSA "we have consistently been the highest (or one of the two highest) rate provider in recent weeks, but we're justifiably reluctant to go higher given our recent media experience", and that the FSA "agreed that the approach we've been adopting seems sensible in the circumstances".
In early December, the CFTC said that the Barclays employee responsible for submitting the bank's dollar Libor rates contacted it to complain that Barclays was not setting "honest" rates.
The employee emailed his supervisor about his concerns, saying: "My worry is that we (both Barclays and the contributor banle panel) are being seen to be contributing patently false rates.
"We are therefore being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators. Can we discuss urgently please?"
On 6 December a Barclays compliance officer contacted the FSA about concerns over the levels that other banks were setting their US Libor rate. This was made after a submitter flagged to compliance his concern about mis-reporting the rate. Compliance informed the FSA that "we have consistently been the highest (or one of the two highest) rate provider in recent weeks, but we're justifiably reluctant to go higher given our recent media experience".
He also reported that the FSA "agreed that the approach we've been adopting seems sensible in the circumstances, so I suggest we maintain status quo for now".
In a phone call on 17 December a Barclays employee told the New York Fed that the Libor rate was being fixed at a level that was unrealistically low.
On 11 April a New York Fed official queried a Barclays employee in detail as to the extent of problems with Libor reporting. The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its Libor submissions, relative to other participating banks
On 16 April, the Wall Street Journal published a report that questioned the integrity of Libor.
Around this time, according to the CFTC, a senior Barclays treasury manager informed the BBA in a phone call that Barclays had not been reporting accurately. But he defended the bank, saying it was not the worst offender: "We're clean, but we're dirty-clean, rather than clean-clean."
Bank of England emails 2008
"No one's clean-clean," the BBA representative responded.
According to the FSA, following the Wall Street Journal report, Barclays received communications from the BBA expressing concern about the accuracy of its Libor submissions. The BBA said if the media reports were true, it was unacceptable.
On 17 April, a manager made comments in a call to the FSA that Barclays had been understating its Libor submissions: "We did stick our head above the parapet last year, got it shot off, and put it back down again. So, to the extent that, um, the Libors have been understated, are we guilty of being part of the pack? You could say we are... Um, so I would, I would sort of express us maybe as not clean clean, but clean in principle."
In late April officials from the New York Federal Reserve Bank - which oversees the banks in New York - met to determine what steps might be taken to address the problems with Libor, and notified other US agencies.
On 6 May the New York Fed briefed senior officials from the US Treasury in detail, and thereafter sent a further report on problems with Libor.
The New York Fed officials also met with BBA officials to express their concerns and establish in greater depth the flaws in the Libor-setting process.
On 29 May, Barclays agreed internally to tell the media that the bank had always quoted accurate and fair Libors and had acted "in defiance of the market" rather than submitting incorrect rates, according to the FSA.
In early June, Tim Geithner, who was the head of the New York Fed at the time, sent Bank of England governor Sir Mervyn King, a list of proposals to to try to tackle Libor's credibility problem.
They included the need "to eliminate the incentive to misreport" by protecting the identity of the banks that submitted the highest and lowest rates.
Sir Mervyn and Mr Geithner, now US Treasury Secretary, had discussed the matter at a central bankers' gathering a few days earlier.
Shortly afterwards, Sir Mervyn confirmed to Mr Geithner that he had passed the New York Fed's recommendations onto the BBA soon afterwards.
US concerns about Libor
Spring: The BBA prepares a review of Libor, later described by the Bank of England's deputy governor Paul Tucker as "tremendously important because of the eroding credibility of Libor". The Bank wanted Libor to reflect actual rates, not subjective submissions. Mr Tucker rang the banks stressing the review should be carried out by senior representatives, not the junior people normally sent to sit on the BBA committee.
On 10 June, the BBA published a consultation paper seeking comments about proposals to modify Libor. "The BBA proposes to explore options for avoiding the stigma whilst maintaining transparency," it said. Barclays contributed comments but avoided mentioning its own rate submissions.
On 5 August, the BBA published a feedback statement on its consultation paper, and concluded that the existing process for submissions would be retained.
Sept 2008 - Libor rates spike after the collapse of Lehman Brothers at the height of the global financial crisis. Rate setting at the time is central to investigations of rigging.
In September, following the collapse of Lehman Brothers, the Bank of England had a conversation with a senior Barclays official, in which the Bank raised questions about Barclays' liquidity position and its relatively high Libor submissions.
Bob Diamond's notes of phone conversation with Paul Tucker
Emailed to then-chief executive John Varley on 30/10/2008. Copied to Jerry del Missier.
Date: 29 October 2008
Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the Libor pricing. His response was "you have to pay what you have to pay". I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response "oh, that would be worse".
I explained again our market rate driven policy and that it had recently meant that we appeared in the top quartile and on occasion the top decile of the pricing. Equally I noted that we continued to see others in the market posting rates at levels that were not representative of where they would actually undertake business. This latter point has on occasion pushed us higher than would otherwise appear to be the case. In fact, we are not having to "pay up" for money at all.
Mr Tucker stated the levels of calls he was receiving from Whitehall were "senior" and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.
On 13 October, the UK government announces plans to pump billions of pounds of taxpayers' money into three major banks, effectively part-nationalising Royal Bank of Scotland (RBS), Lloyds TSB and HBOS.
A week later, on 21 and 22 October, Paul Tucker and senior government official Sir Jeremy Heywood discussed why Libor in the UK was not falling as fast as in the US, despite government action. Sir Jeremy also asked why Barclays' borrowing costs were so high. "A lot of speculation in the market over what they are up to," he says in an email.
In subsequent evidence to the Treasury Select Committee Mr Tucker later suggests there was widespread concern at this time that Barclays was "next in line" for emergency government help. He was in regular contact with Bob Diamond, emails show.
On 24 October a Barclays employee tells a New York Fed official in a telephone call that the Libor rate is "absolute rubbish".
On 29 October Paul Tucker and Bob Diamond - head of Barclays' investment bank at the time - speak on the phone. According to Mr Diamond's account of the conversation, emailed to colleagues the next day, Mr Tucker said senior Whitehall officials wanted to know why Barclays was "always at the top end of Libor pricing".
According to the Barclays chief executive, Mr Tucker said the rates "did not always need to be the case that we appeared as high as we have recently". Mr Tucker later said that gave the "wrong impression" of their conversation and said he did not encourage Barclays to manipulate its Libor submissions.
Following this discussion with the Bank of England, Barclays instructed Libor submitters to lower the rate to be "within the pack".
On 17 November, the BBA issued a draft document about how Libor rates should be set and required banks to have their rate submission procedures audited as part of compliance. The final paper would be circulated on 16 July 2009.
On 2 November the BBA circulated guidelines for all contributor banks on setting Libor rates in the same manner. Barclays made no changes to its systems to take account of the BBA guidelines.
In December Barclays started to improve its systems and controls but ignored the BBA's guidelines. Until 2009 the bank did not have a formal Chinese wall between the derivatives team and the submitters.
The Financial Services Authority (FSA) launches an investigation into Barclays as part of a global probe into the industry over allegations of interest rate manipulation.
In June, Barclays circulated an email to submitters that set out "fundamental rules" that required them, for example, to report to compliance any attempts to influence Libor submissions either externally or internally. It also prohibited communication with external traders "that could be be seen as an attempt to agree on or impact Libor levels".
Aug 2011 - Discount brokerage and money manager Charles Schwab Corp files lawsuits accusing 11 major banks of conspiring to manipulate Libor.
In late 2011, Royal Bank of Scotland sacked four people for their alleged roles in the Libor-fixing scandal.
22/3 June 2012
Bob Diamond learns of emails sent by dodgy traders. He later says reading them made him feel "physically ill" and that it was the first he knew of trader misconduct.
The banking industry is engulfed in a fresh scandal after Barclays pays £290m to settle claims that it used underhand tactics to try to rig financial markets. The penalties from UK and US regulators, who have been investigating for several years, include a record £59.5m fine from the FSA, and follow allegations it manipulated Libor and Euribor interbank lending, which govern the rates at which banks are prepared to lend to each other in the wholesale money markets.
In the depths of the financial crisis, Barclays gave false information about the interest rates it had to pay to borrow money in an effort to paint a false picture of its health to markets. Diamond, who was in charge of Barclays Capital at the time the breaches occurred between 2005 and 2009, apologises and says he and three other key executives will waive their bonuses for this year.
The City watchdog publishes messages found by investigators, providing a shocking insight into the informal and casual exchanges between traders and rate submitters. The FSA trawled through emails, instant messages and phone transcripts to uncover any underhand tactics used by traders and Barclays staff to influence the rate at which banks lend to each other.
In one request for a change to the Libor, a trader said: "Please feel free to say no. Coffees will be coming your way either way, just to say thank you for your help in the past few weeks." To which the Barclays submitter responded: "Done, for you big boy."
The FSA is investigating several other lenders including HSBC and RBS. Serious Fraud Office investigators are in talks with the FSA over the scandal, and pressure is mounting on Diamond to stand down.
Diamond writes to the Treasury select committee saying: "When the trader conduct was first discovered by more senior management, steps were immediately taken to stop it, and it was reported to the authorities." No date is given for this but he says the bank "took steps necessary to strengthen its systems and controls to prevent any repeat". He adds that because of ongoing civil and criminal investigations there will be some questions he cannot answer.
A fresh mis-selling scandal caps a nightmare week for the banking industry, as the FSA announces it has found "serious failings" in the sale of complex interest rate hedging products to some small and medium-sized businesses. It reaches agreement with Barclays, HSBC, Lloyds and RBS to provide appropriate compensation where mis-selling occurred.
An urgent independent review into the inter-bank lending rate is to be set up by the government in the wake of the interest-rigging scandal. The review will consider the future operation of the Libor rate and the possibility of introducing criminal sanctions, a Treasury source says. Diamond is summoned to appear before the Treasury select committee the following Wednesday.
Marcus Agius is reported to be on the brink of stepping down as Barclays chairman. The business secretary, Vince Cable, backs calls for a criminal investigation into bankers involved in the Libor affair. Agius announces the following day that he will step down in November.
Diamond announces he is stepping down with immediate effect and his right-hand man Jerry del Missier also resigns. In a media briefing, Barclays says: "Many of the individuals concerned in the trader conduct, in particular, are in fact no longer with the bank." Details remain sketchy, with Barclays saying individuals who remain are being "reviewed to assess their accountability".
Diamond tells the Treasury select committee he had no knowledge that anything untoward was happening in October 2008, insisting he was never made aware of the issues. The American-born banker also denies he is "personally culpable" for traders' errant dealings.
It is announced that Tucker, the Bank of England deputy, will appear before the Treasury select committee the following Monday to discuss the rate-rigging scandal at Barclays.
The Serious Fraud Office director, David Green QC, decides to formally accept the Libor-fixing claims for criminal investigation.
Tucker tells MPs he denies "absolutely" any suggestion that he encouraged Barclays to undercall their Libor submissions.
Diamond says in a letter to the select committee's chairman, Andrew Tyrie, that he is "dismayed" that Tyrie and some of his fellow committee members suggested he was "less than candid" when he appeared before them.
Sir David Walker, the City grandee who oversaw a review into bank governance for Gordon Brown, is announced as the next chairman of Barclays. He will join as non-executive director from 1 September before succeeding Agius as chairman from 1 November.
Barclays, HSBC and Royal Bank of Scotland are subpoenaed in America over the possible manipulation of an important global interest rate. The attorneys general of New York and Connecticut also issue subpoenas to Citigroup, Deutsche Bank, JPMorgan Chase, and UBS.
Aug 2012 - A joint New York-Connecticut investigation of Libor send subpoenas to Royal Bank of Scotland, HSBC Holdings, JPMorgan, Deutsche Bank, Barclays, UBS and Citigroup. The subpoenas seek communication between executives related to possible collusion that may have played a role in alleged rate manipulation.
Sept 2012 - The BBA says it will support any recommendation by Martin Wheatley, the FSA's managing director, for a change of responsibility in setting the rate. The FSA delivers a 10-point plan to overhaul Libor on September 28, but stops short of scrapping the benchmark interest rate.
Nov 2012 - Deutsche Bank faces sceptical German lawmakers who are seeking answers about how banks manipulated global benchmark interest rates. On the same day, Barclays says it fired five employees following its investigations into Libor rigging.
Dec 2012 - The first three arrests are made in the scandal. Former Citigroup and UBS trader, Thomas Hayes, as well as Terry Farr and Jim Gilmour, employees of inter-dealer broker RP Martin, are understood to be the men arrested at their homes in Surrey and Essex.
Days later Swiss banking giant UBS agrees to pay £940m to regulators in order to settle charges of manipulating Libor interest rates, fraud and paying bribes to brokers. The penalty is the second-largest fine paid by a bank and is more than three times the £290m fine levied on Barclays in June for attempting to rig the Libor benchmark rate used to price financial contracts around the world.
A new raft of issues come to light, with key heaedlines:
- RBS braced for hefty Libor fines
- RBS eyes bonus pot to recoup Libor losses
- Libor scandal: RBS executives under pressure to resign
- UBS admits Libor fixing had been going on for years
- Banking Standards Commission accuses former UBS bosses accused of 'staggering ignorance' over Libor rigging
- UBS Libor traders branded 'mercenaries' by former chief
- Deutsche's '£400m from bets on rates'
With regard to the issues, the BBA published a report in November 2012, “Strengthening LIBOR – proposal to implement recommendation number 6 of ‘The Wheatley Review of LIBOR’” .
The report clearly shows a 2013 timeline for dealing with the issues raised and solutions offered to the LIBOR markets:
Discontinuance of publication of New Zealand Dollar fixings within the LIBOR framework.
Discontinuance of publication of Danish Krone and Swedish Krona fixings within the LIBOR framework.
Removal of two week, four-, five-, seven-, eight-, nine-, ten- and eleven- month fixings for all currencies within the current LIBOR framework, along with removal of Australian and Canadian dollar fixings.
This will leave Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP), Swiss Franc (CHF) and US Dollar (USD) currencies within the LIBOR arrangements for overnight/spot-next, 1 Week, 1 Month, 3 Month, 6 Month, 12 Month fixings.
At the end of the LIBOR timeline last week, I mentioned that the British Bankers’ Association (BBA) has implemented a response to the Wheatley review which means that several of the currencies covered by LIBOR will be discontinued.
The Association of Corporate Treasurers (ACT) issued a response to this to enable corporate treasurers to find alternative ways to deal with the discontinued currencies: Australian Dollars (AUD), Canadian Dollars (CAD), Danish Krone (DKK), New Zealand Dollars (NZD) and Swedish Krona (SEK).
Here’s a summary of their advice.
The bank bill interest rate is treated as the wholesale interbank rate within Australia, and is published by the Australian Financial Markets Association (AFMA). It is the borrowing rate among Australia’s top market makers.
The reference rate is typically referred to as the “bank bill rate” although the actual term is the “bank bill swap interest rate” hence the abbreviation BBSW.
BBSW rates are made public on a 24 hours delay basis from AFMA’s website http://www.afma.com.au/data/bbsw.html, and live rates are available for a paid subscription or on vendor pages such as Bloomberg and Reuters.
The Canadian Dollar Offered Rate (CDOR) is the recognised benchmark index for bankers’ acceptances with maturities up to one year. It is calculated and published daily at 10:15 by Thomson Reuters on the CDOR page of Reuters’ Monitor Service. CDOR is used as a reference rate in setting the floating interest rate in commercial agreements and as the settlement price for a number of derivatives including futures contracts and swaps. It is worth noting that the sponsor of CDOR, the Investment Industry Regulatory Organization of Canada (IIROC), is currently performing a review of how the rate is set.
The Copenhagen Interbank Offered Rate (CIBOR) is compiled and published by NASDAQ OMX at approximately 11am daily. It represents the average interest rate at which term deposits are offered between prime banks in the Danish wholesale money market or interbank market.
The Danish Bankers Association has the overall responsibility for CIBOR publishes rules governing CIBOR rate fixings. These can be found at (in Danish) http://www.finansraadet.dk/tal--fakta/satser/regler-for-fastlaeggelse-af-cibor.aspx . However, following the LIBOR scandal, the Danish government is passing legislation to move supervision of rate-setting to the Danish Financial Supervisory Authority http://www.finanstilsynet.dk/en.aspx .
New Zealand Dollar
The New Zealand Financial Markets Association (NZFMA) manages, calculates and distributes New Zealand official market reference rates and pricing services, including the NZ Bank Bill Reference Rate (BKBM).
NZ BKBMs are downloaded to the NZFMA website at approximately 4 pm New Zealand Time (NZT) each day, and may be found at http://www.nzfma.org/system/bkbm/default.aspx . Live rates are available on a paid subscription basis. NZFMA Bank Bill rates are also published and available on Thomson Reuters: page code BKBM and Bloomberg: page code NZFM1<GO> through the NZdata service.
The Stockholm Interbank Offered Rate (STIBOR) is compiled and published by NASDAQ OMX Stockholm at 11.05am daily. STIBOR is an arithmetic average of the rates quoted by five banks on the STIBOR panel. These banks are: Danske bank, Handelsbanken, Nordea, SEB and Swedbank. STIBOR is based on the offered rates that each bank in the panel can offer to the other banks in the panel for unsecured loans in SEK. If the lowest and/or highest bid differs with 25 basis points or more from the second lowest and second highest bid it will be excluded from the calculation. STIBOR is then calculated as an average of these rates.
The STIBOR rate sponsor is Riksbank. Riksbank performed a review of STIBOR in November 2012 outlining the need for a number of reforms. A copy of the report can be found at: http://www.riksbank.se/Documents/Rapporter/Riksbanksstudie/2012/rap_riksbanksst udie_stibor_121128_eng.pdf .